‘Fair value is a central notion in accounting practice, research and standard setting This book, whose chapters are authored by top-notch accountants and academics, rolls over each of these dimensions to provide an authoritative and comprehensive analysis of the state-ofart and future developments in this area I think it is a “must” for those interested in fair value accounting.’ Salvador Carmona, Rector, IE University, Spain Past President of the European Accounting Association and past editor of the European Accounting Review ‘Perhaps no issue in accounting has been as controversial as fair value Written from the unique perspectives of leading scholars around the world, this collection explores its far-reaching implications for managers, regulators, and the stability of financial markets An engaging and accessible foray into the complex world of fair value accounting.’ Karen Nelson, Texas Christian University, USA The Routledge Companion to Fair Value in Accounting The concept of ‘fair value’ marked a major departure from traditional cost accounting In theory, under this approach a balance sheet better reflects the current value of assets and liabilities Critics of fair value argue that it is less useful over longer time frames and prone to distortion by market inefficiencies resulting in pro-cyclicality in the financial system by exacerbating market swings Comprising contributions from a unique mixture of academics, standard-setters and practitioners, and edited by internationally recognized experts, this book, on a controversial and intensely debated topic, is a comprehensive reference source that • • • examines the use of fair value in international financial reporting standards (IFRS) and the US standard SFAS 157 Fair Value Measurement, setting out the case for and against; looks at fair value from a number of different theoretical and practical perspectives, including a critical review of the merits and arguments against the use of fair value accounting; and explores fair value accounting in practice, involvement in the Great Financial Crisis, implications for managerial reporting discretion, compensation and investment This volume is an indispensable reference that is deserving of a place on the bookshelves of both libraries and all those working in, studying or researching the areas of international accounting, financial accounting and reporting Gilad Livne is Professor of Accounting at the University of Exeter, UK Garen Markarian is Chair of Financial Accounting at WHU, Vallendar, Germany Routledge Compa nions in Busin ess, M a nagement a n d Accou nting Routledge Companions in Business, Management and Accounting are prestige reference works providing an overview of a whole subject area or sub-discipline These books survey the state of the discipline including emerging and cutting-edge areas Providing a comprehensive, up-to-date, definitive work of reference, Routledge Companions can be cited as an authoritative source on the subject A key aspect of these Routledge Companions is their international scope and relevance Edited by an array of highly regarded scholars, these volumes also benefit from teams of contributors that reflect an international range of perspectives Individually, Routledge Companions in Business, Management and Accounting provide an impactful one-stop-shop resource for each theme covered Collectively, they represent a comprehensive learning and research resource for researchers, postgraduate students and practitioners Published titles in this series include the following: The Routledge Companion to Air Transport Management Edited by Nigel Halpern and Anne Graham The Routledge Companion to the Geography of International Business Edited by Jonathan Beaverstock, Gary Cook, Jennifer Johns, Frank McDonald and Naresh Pandit The Routledge Companion to Risk, Crisis and Security in Business Edited by Kurt J Engemann The Routledge Companion to Fair Value in Accounting Edited by Gilad Livne and Garen Markarian For more information about this series, please visit: https://www.routledge​.com/RoutledgeStudies-in-Genocide-and-Crimes-against-Humanity/book-series/RSGCH The Routledge Companion to Fair Value in Accounting Edited by Gilad Livne and Garen Markarian First published 2018 by Routledge Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 711 Third Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2018 selection and editorial matter, Gilad Livne and Garen Markarian; individual chapters, the contributors The right of Gilad Livne and Garen Markarian to be identified as the authors of the editorial material, and of the authors for their individual chapters, has been asserted in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988 All rights reserved No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Names: Livne, Gilad, editor | Markarian, Garen, editor Title: The Routledge companion to fair value in accounting / edited by Gilad Livne and Garen Markarian Other titles: Companion to fair value in accounting Description: First Edition | New York: Routledge, 2018 | Series: Routledge companions in business, management and accounting | Includes bibliographical references and index Identifiers: LCCN 2018002849| ISBN 9781138656505 (hardback) | ISBN 9781315621876 (ebook) Subjects: LCSH: Fair value—Accounting Classification: LCC HF5681.V3 R68 2018 | DDC 657/.7—dc23 LC record available at https://lccn.loc.gov/2018002849 ISBN: 978-1-138-65650-5 (hbk) ISBN: 978-1-315-62187-6 (ebk) Typeset in Bembo by codeMantra Contents Contributors x Preface xvi    Prologue: A reflection 1 Does the usage of fair values increase systemic risks? 3 Alan Ball and Andrew Haldane PART I Standards and conceptual issues 23 Fair value and the Conceptual Framework 25 Andrew Lennard Fair value accounting: a standard-setting perspective 41 Michel Magnan and Antonio Parbonetti Have the standard-setters gone too far, or not far enough, with fair value accounting? 56 Ken Peasnell Shareholder value, financialization and accounting regulation: making sense of fair value adoption in the European Union 73 Vera Palea vii Contents Part II Fair value, risk and financial crisis 89 Measuring fair value when markets malfunction: evidence from the financial crisis 91 Amir Amel-Zadeh and Geoff Meeks Fair value accounting in financial institutions 106 Christof Beuselinck and Arnt Verriest Bank risk management – and fair value accounting 136 Thomas A Gilliam and Ronny K Hofmann The use of fair value accounting in risk management in non-financial firms 155 John L Campbell, Jenna D’Adduzio and Jon Duchac Part III Development 179 10 The history of the fair value term and its measurements 181 Martin E Persson, Frank L Clarke and Graeme W Dean 11 The ‘fairness’ of fair value accounting: marking-to-market, marking-to-model and financial reporting management 199 Kalin Kolev 12 Let the fox guard the henhouse: how relaxing the three-level fair value hierarchy increases the reliability of fair value estimates 214 Ester Chen, Ilanit Gavious and Uriel Haran Part IV Specific topics 229 13 Fair value accounting: a manager’s perspective 231 Thomas A Gilliam and Ronny K Hofmann 14 Tax-related implications of fair value accounting 253 Kay Blaufus and Martin Jacob 15 Fair value accounting and executive compensation 274 Gilad Livne and Garen Markarian viii Contents 16 Fair value and the formation of financial market prices through ignorance and hazard 288 Yuri Biondi 17 Fair value accounting: China experience 296 Jun Chen and Yong Yu 18 Fair value accounting and family firms 312 Pietro Mazzola and Massimo De Buglio Index 331 ix Pietro Mazzola and Massimo De Buglio accounting standards for private family firms, and leading public family firms to use the fair value approach only in circumstances where using other accounting methods is not permitted A second insight concerns the traditional operating models adopted by family firms and their potential recourse to transactions for which IAS/IFRS mandate the disclosure or recognition of accounting amounts using fair values Drawing on prior studies, we illustrate that family firms can engage less frequently, compared to non-family firms, in acquisitions; family firms make less recourse to the fair value measurement required by the adoption of equity-based incentive systems; and the perception of exit strategies as a failures rather than a proper portfolio or business decision may lower the likelihood of family firms developing the intention to sell or liquidate non-current assets or group disposal pertaining to the family firm’s core business Existing studies provide conflicting theoretical arguments and empirical evidence on the use of financial leverage, while family firm risk-aversion may lead to refraining from a speculative use of derivatives Overall, the strategic and financial models of family firms can reduce the number of transactions for which IAS/IFRS mandate the disclosure or the recognition of accounting amounts using fair values Finally, we highlight that the potential impact of family firm status on fair value measurement quality has thus far been overlooked in literature Based on the two alternative views used in accounting literature to examine the impact of family firm status on earnings management and disclosure policies, it could be argued that family firm status may both enhance and reduce the reliability of fair value measurement However, arguments supporting the potential positive effect of family firm status on fair value measurement can be drawn combining prior studies on the antecedents of the delay in recognizing goodwill impairment and the still-scarce knowledge of the family firm status effect on this indirect application of fair value accounting Additional arguments in support of the potential existence of a positive effect of family firm status on fair value measurement could be drawn from integrating recent studies on impairment test implementations, and the impact of founding family ownership on accounting conservatism and on real earnings management Based on the converging arguments of these prior theoretical views and empirical evidence, we suggest that the specific set of priorities and preferences of family firms can positively affect the reliability of fair value measurement practices This study has several limitations We believe this chapter is a first step in the inquiry on fair value accounting and family firms, calling for further development to identify a more comprehensive understanding of the effects of family firm status on fair value accounting and thereby increase the generalizability of our findings The proposed relationships should then be tested in a subsequent research phase to confirm the existence of the identified effects Notes See IFRS 13, § See IFRS 13, § 24 See IFRS 13, §§ 27–30 References Abdel-Khalik, AR 2011, “Fair value accounting and stewardship”, Accounting Perspectives, vol 9, no 4, pp 253–269 Achleitner, A, Gunther, N, Kaserer, K, & Siciliano, G 2014, “Real earnings management and a­ ccrual-based earnings management in family firms”, European Accounting Review, vol 23, no 3, pp 431–461 Ali, A, Chen, T, & Radhakrishnan, S 2007, “Corporate disclosures by family firms”, Journal of Accounting and Economics, vol 44, no 1/2, pp 238–286 328 Fair value accounting and family firms Anderson, RC & Reeb, DM 2003, “Founding-family ownership and firm performance: evidence from the S&P 500”, Journal of Finance, vol 58, no 3, pp 1301–1328 André, P, Filip, A & Paugam, L 2015, “The effect of mandatory IFRS adoption on conditional conservatism in Europe”, Journal of Business, Finance & Accounting, vol 42, no 3–4, pp 482–514 Astrachan, J, Klein, SB & Smyrnios, KX 2002, “The F-PEC scale of family influence: a proposal for solving the family business definition problem”, Family Business Review, vol 16, no 3, pp 207–213 Barth, ME 1994, “Fair value accounting: evidence from investment securities and the market valuation of banks”, The Accounting Review, vol 69, pp 1–25 Barth, ME & Landsman WR 2010, “How did financial reporting contribute to the financial crisis?”, European Accounting Review, vol 19, no 3, pp 399–423 Bertrand, M & Schoar, A 2006, “The role of family in family firms”, Journal of Economic Perspectives, vol 20, no 2, pp 73–96 Chen, S, Chen, X & Cheng, Q 2008, “Do family firms provide more or less voluntary disclosure?”, Journal of Accounting Research, vol 46, vol 3, pp 499–536 Chen, S, Chen, X & Cheng, Q 2014, “Conservatism and equity ownership of the founding family”, European Accounting Review, vol 23, no 3, pp 403–430 Chrisman, JJ, Chua, JH & Sharma, P 2005, “Trends and directions in the development of a strategic management theory of the family firm”, Entrepreneurship Theory and Practice, vol 29, no 5, pp 555–576 Christensen, HB, Lee, E & Walker, M 2015, “Incentives or standards: What determines accounting quality changes around IFRS adoption?”, European Accounting Review, vol 24, pp 31–61 Corbetta, G & Salvato, C 2004, “Self-serving or self-actualizing? 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Governance, longterm orientations, and sustainable capability”, Entrepreneurship Theory and Practice, vol 30, pp 731–746 Lennard, A 2018, “Fair value and the conceptual framework”, in this handbook 329 Pietro Mazzola and Massimo De Buglio Lumpkin, GT, Brigham, KH & Moss, T 2010, “Long-term orientation: implications for the entrepreneurial orientation and performance of family businesses”, Entrepreneurship and Regional Development, vol 22, no 3, pp 241–264 Magnan, M 2009, “Fair value accounting and the financial crisis: messenger or contributor?”, Accounting Perspectives, vol 8, no 3, pp 189–213 Magnan, M & Parbonetti, A 2018, “Fair value accounting: a standard setting perspective”, in this handbook Miller, D & Le Breton-Miller I 2006, “Family governance and firm performance: agency, stewardship and capabilities, Family Business Review, vol 19, no 1, pp 73–87 Miller, D, Le Breton-Miller, I & Lester, RH 2010, “Family ownership and acquisition behavior in publicly traded companies”, Strategic Management Journal, vol 31, no 2, pp 201–223 Naldi, L, Nordqvist, M, Sjöberg, K & Wiklund, J 2007, “Entrepreneurial orientation, risk taking, and performance in family firms”, Family Business Review, vol 20, pp 33–47 Prencipe, A, Bar-Yosef, S, Mazzola, P & Pozza, L 2011, “Income smoothing in family-controlled companies: evidence from Italy”, Corporate Governance: An International Review, vol 19, no 16, pp 529–546 Prencipe, A, Bar-Yosef, S, Dekker, HC 2014, “Accounting research in family firms: theoretical and empirical challenges”, European Accounting Review, vol 23, no 3, pp 361–385 Ramanna, K & Watts, RL 2012, “Evidence on the use of unverifiable estimates in required goodwill impairment”, Review of Accounting Studies, vol 17, pp 749–780 Ronen, J 2008, “To fair value or not to fair value: a broader perspective”, ABACUS, vol 44, no 2, pp 181–208 Salvato, C & Moores, K 2010, “Research on accounting in family firms: past accomplishments and future challenges”, Family Business Review, vol 23, no 3, pp 193–215 Schulze, WS, Lubatkin, MH & Dino, RN 2003, “Exploring the agency consequences of ownership among the directors of private family firms”, Academy of Management Journal, vol 46, no 2, pp 179–194 Sraer, D & Thesmar, D 2007, “Performance and behavior of family firms: evidence from the French stock market”, Journal of the European Economic Association, vol 5, no 4, pp 709–751 Steier, L 2003, “Variants of agency contracts in family financed ventures as a continuum of familial altruisitic and market rationalities”, Journal of Business Venturing, vol 18, pp 597–618 Strebulaev, IA & Yang, B 2013, “The mystery of zero-leverage firms”, Journal of Financial Economics, vol 109, pp 1–23 Tagiuri, R & Davis, JA 1996, “Bivalent attributes of the family firm”, Family Business Review, vol 9, no 2, pp 199–208 Villalonga, B & Amit, R 2006, “How family ownership, control and management affect firm value?”, Journal of Financial Economics, vol 80, no 2, pp 385–417 Wang, D 2006, “Founding family ownership and earnings quality”, Journal of Accounting Research, vol 44, pp 619–656 Whittington, G 2008, “Fair value and the IASB/FASB conceptual framework project: an alternative view”, ABACUS, vol 44, no 2, pp 139–168 Zellweger, T, Eddleston, K & Kellermanns, FW 2010, “Exploring the concept of familiness: Introducing family firm identity”, Journal of Family Business Strategy, vol 1, pp 54–63 Zellweger, T, Kellermanns, FW, Chrisman, JJ & Chua, J 2012, “Family control and family firm valuation by family CEOs: the importance of intentions for transgenerational control”, Organization Science, vol 23, pp 851–868 330 Index accountancy (modern), start of accounting: capitalization of costs 275; changes in 59; consequences of derivatives 168–175; conventions see also fair value; cost of systems 235; derivatives 164–168; development of consolidated techniques 60; employee stock options (ESOs) 67; for expected losses 12–13; fair value accounting (FVA) 41–55 see also fair value accounting (FVA); hedging 140–142, 160, 164–168; historical 234; historical cost 240; influence on operating decisions 243; regulations 73–75; role of 291; rules and financial crises 140; short-term 237; standards 27, 32, 48, 53, 60, 92–93, 214; traditional 233 Accounting, Evaluation & Economic Behavior (Chambers) 190, 191 Accounting Hall of Fame 190 Accounting Principles Board Opinions (APBOs) 34 Accounting Research Bulletins (ARBs) 43 The Accounting Review 184 Accounting Series Releases (ASR) 44 Accounting Standard Update (ASU) 92 accruals 200 Accumulated Other Comprehensive Income (AOCI) 167, 168, 170, 173, 174 The Accuracy of Economic Observations (Morgenstern) 69 acquisition 29, 33 adjusted market assessment approach 47–48 Admati, A 100 agency, market 292 agendas, fair value 10–11 Ahmed, A 169 Akerlof, G 96 algorithms, standard-setters 92 alignment hypothesis 313 Allayannis, G 168 Altamuro, J 207, 208 Alvarez, I 80 Amel-Zadeh, A 91, 97 American Bankers Association (ABA) 91, 108 American Institute of Accountants (AIAs) 43 American Institute of Certified Public Accountants (AICPA) 42, 192 amortization 12; fair value versus amortized cost 113–114; historical cost 204; measurement 114 apparent arbitrage applications of fair value accounting (FVA) 67–68 arbitrage 6, Arthur Anderson 238, 239 ASC 820 201 ASC 825 201, 205 asset-backed securities 122, 125 assets 26, 28, 77; available-for-sale (AFS) 61, 62, 277; changing values of 237; collateral 243; at current market values 139; designated at fair value 117–118; fair value 50, 114–120, 131–133; fair value accounting (FVA) 106; fair value assets (FVA) 111; fixed 232; GAAP 203; historical cost 29; level (fair value) 188, 203; liquidation values 218, 236; losses 36; market prices 107; ‘mark-to-market’ 106; measurement 137; non-financial 204; prices 27, 142; replacement 183; reporting 32; rules 140; trading 116–117; types of 110–113; valuation of 120–122; value of 52 auditors 235, 238 Auerbach, AJ 265 available-for-sale (AFS) 277, 297, 306; financial assets 61, 62; securities 112 331 Index Badertscher, B 63, 110 Badoer, Jachomo 192 balance-guaranteed swaps 118 balance sheets 137, 155, 184, 188, 200; cash flow hedge amounts 170–173; commercial banks 242; linking 205; measurements 203 Ball, R 46, 51 banking models 136 banking systems: during the Great Depression 4; soundness of bank risk management 136–154; academic evidence 138–139; disclosures of risk management practices 147–150; dynamic loan loss provisioning 143–144; embedded derivatives 146–147; fair value accounting (FVA) 139–140; hedging 140–142; illustrations 149–152; impaired loans 151; macro hedging 142–143; risk management 145–146 bankruptcy 160 Bankruptcy Act of 1831 bank systems: business models 13–14; regulations 136 Banque de France 80 Barlev, B 79 Barth, ME 91 Basel Pillar framework 14 BASE No 39 298, 301 Baxter, WT 59 Bear Stearns 108 Beatty, A 138 Beaver, WH 27, 46 Bebchuk, Lucien 280 behavior: financial reporting 220–221; regulations 221–222 Bell, PW 35, 59, 189 Bens, DA 208 Benston, GJ 64 Berkshire Hathaway 199 bias of fair value 199 Bichler, S 193 Big Biondi, Y 80 Bisschof, J 110 Biurks, J 110 Black, F 65 Black-Scholes-Merton model 65, 139 Black-Scholes model 64, 67, 279, 285 Blankespoor, E 207 Blankfein, Lloyd Bloomberg Professional database 219 Bodnar, G 159 Bonbright, JC 59 bonds 108, 136, 238 bonuses 277 see also executive compensation bookkeeping, double-entry book-tax conformity (BTC) 221 borrowing (FVA) 241–243 Bretton Woods system 56 Brown, J 80 Brown, P 46 Bryan, D 73 Buffett, Warren 199 Burks, J 63 Bush, George H W 5, business models 13–14 calculations: fair value 259; non-GAAP earnings 209 California v Pacific Gas & Electric Co (1938) 184 Campbell, J 174, 175 Canada 45 Canadian Institute of Chartered Accountants (CICA) 45 Cannon v Mills Co (1928) 189 capital gains, taxes 117, 253, 265–266, 267, 268, 271 capitalism 74, 77, 81–83 capitalization of costs 275 capital markets 79, 168–175, 239–241 caps 118 cash 110, 111 cash bonuses 277 see also executive compensation cash deposit accounts 136 cash flow 37–38, 52, 125, 131, 241; assessments 94; discounted cash flows (DCFs) 220; discounts 95, 122; future 46; hedge amounts 170–173, 173–174; hedging 142, 167–168; Statement of Cash Flows 93; timing differences with hedges 170; volatilities 156, 158, 159, 160 cash reserves 243 CFA Institute 48, 65 Chambers, Raymond 58, 59, 189, 190, 191, 192, 193, 194 Chambers, RJ 45 Chen, J 298 Cheng, K 109 Cheng, M 208 chief executive officers (CEOs) 280 see also executive compensation China 296–311; adoption of IFRS 296; contracting usefulness of fair values 305–306; evolution of fair value measurement 297–302; extant literature 304; fair value studies 307–308; forecasts 307, 308; FVA and earnings manipulation 306–307; FVA and the institutional environment 302–304; gross domestic product (GDP) 296, 297, 302; historical cost 307; historical cost stage (1992–1997) 298; IFRS 300–302; IFRS stage (2007 to present) 300–302; initial introduction stage (1998–2000) 298–299; 332 Index market prices 304; privatization 302; prohibition stage (2001–2006) 299–300; property rights 303; taxes 299, 300; valuation usefulness of fair values 304–305 China Accounting Standard (CAS): CAS 22 297, 300; CAS 23 297, 300; CAS 37 297, 300 Chung, B 130 Chung, SG 215, 219, 220 Cioffi, Ralph 96 circumstances, fair value market prices over 290–292 Clark, C 307 Clarke, FL 182, 183, 184, 185, 187, 188, 191, 192 claw-back problem 282 clearing prices 292 collateral assets 243 collection, credit 233 Collins, D 100 commercial banks 136, 242 commercial loans 238, 241 Committee on Accounting Procedure (CAP) 42, 44 commodities 119; price fluctuations 244; use of derivatives 159 Companies Act of 1844 Companies Act of 1862 Companies Act of 1947 Companies Act of 1948 60 compensation: association between fair valued items and 276–278; contracts 281; disclosures 274, 283–285; equity-based 274; executive 274–287; expenses 279–280; historical cost accounting (HCA) 276; history of equitybased compensation 278; options 274; pay-for-performance 280–281; penalties 276; performance measures 275–276; risk 275; stocks 274 compliance 216, 266–267 Comptroller of the Currency 3, Compustat 205, 209, 281 Conceptual Frameworks 79; adjusted market assessment approach 47–48; cash flows 37–38; definitions of elements 30; entity opportunities 33–34; entity-specific perspectives 30–33; entry values 34–37; evolution of standard-setting institutions 43–44; exit values 34–37; fair value and 25–40; faithfulness representativeness 50, 51–53; financial statements 46–47; FVA in today’s standards 47; historical cost 29; market perspectives 30–33; objective of financial reporting 28–29; overview of 26–28; standard-setters 27, 50–51 conditional default rates 123 consistency of fair value 30 Consolidated Financial Statements (IFRS 10) 215 constant purchasing power accounting (CPP) 58 Continental Europe, financial system in 80 contracting usefulness of fair values 305–306 contracts: compensation 281; derivatives see derivatives; notional amount of 157 contractual rights 110, 111 controlling systems 216 conventions, accounting Cooper, Steve 143 corporate governance 130 correlations 123, 124, 292 cost: of accounting systems 235; amortized see amortized cost; amortized historical 204; changes in 240; financial duress 161; financial reporting management 205; historical 29, 42, 57, 203; replacement 25, 35, 58, 183 cost of goods sold (COGS) 173, 174 Couchman, Charles B 184 crashes, markets 63 see also financial crises credit: collection 233; fair value accounting (FVA) 66–67; measurement of losses 146; risks 26 credit default swap (CDS) 61, 119, 141 credit spreads 123, 124 currency: fluctuations 244; swaps 141 current cost accounting (CCA) 56, 57–60, 61, 67 curves, inflation 123 Dammon, RM 265 Daske, H 110 databases: Bloomberg Professional 219; Compustat 281 Datta, MI 283 Dean, GW 182, 188, 191, 192, 195 debt 28; available-for-sale (AFS) financial assets 112; held-to-maturity (HTM) securities 112 Dechow, P 277 decision-making 233, 243, 248, 258–265 deferred tax liability (DTL) 171 Delano, Preston 3, Dell’Ariccia, G 81 Delta Airlines 163–164 Demski, JS 27 depreciation 232, 235 deprival value 59 derivatives 65, 118–119, 121, 123, 125, 136; accounting 164–168; categories of 157; consequences of accounting 168–175; credit default swap (CDS) 61; definitions 156, 158; determinants of use 159–161; embedded and risk management 146–147; financial reporting 155; foreign exchange 123; gains 165; hedging 140, 147; hedging versus speculation 163–164; hedging with 158; risk management 156–158; stand-alone 147 Desjardins Group 50 Detragiache, E 81 Deutsche Bank 137, 149–150 333 Index deviations 262 de Vinci, Leonardo Dichev, I 277 Dillard, J 80 disclosures 56, 94, 110, 120; compensation 274; executive compensation 283–285; fair value 45; Financial Accounting Standards Board (FASB) 175; GAAP (Generally Accepted Accounting Principles) 201; requirements 51, 131, 216; risk 137; of risk management practices 147–150; value-at-risk measures 138, 139; voluntary fair value 130 discounted cash flows (DCFs) 220 discounts, cash flow 122 distributions 292 Dodd-Frank act (2010) 283 Donohoe, MP 266 double-entry bookkeeping dual valuation 65 due diligence 217 Duffie, D 206 Duménil, G 80 dynamic loan loss provisioning 143–144 dynamic risk management 142–143 earnings 46; calculating non-GAAP 209; compensation 276; fair value accounting (FVA) and manipulation of 306–307; guidance 169; historical cost-based 275; management 200, 202–203; market reactions to 233; multiples 123, 124; reporting 236; volatilities 239–241 earnings before interests, taxes, depreciation and amortization (EBITDA) 124, 141 Easton, P 63, 110 Eccles, Marriner S economic crises: 2011 Greek crisis 49; economic crisis (2008) 3, 7, 48–50, 73, 131, 133, 199, xiv; fair value accounting (FVA) 48–50; fair value accounting (FVA) and 62–63; global financial crisis (GFC 2007–2009) 137 economic recovery period (2010 and later) 131 Edwards, EO 35, 59, 189 efficient markets 11, 12, 94, 291, 316 Efficient Markets Hypothesis (EMH) 6, 7, 9, 10, 11 Einstein, A 85 elements, definitions of 30 embedded derivatives 146–147 embedded options 65–66 employee stock options (ESOs) 67 Encyclopedia of Accounting (Lisle) 182, 184 England Enron 64, 200, 201, 238, 239 entities, opportunities 33–34 entity-relevance 32, 33 entrenchment hypothesis 313 entry values 34–37 epistemic conditions 289 equilibrium 12, 289 equity 28; available-for-sale (AFS) financial assets 112; held-to-maturity (HTM) securities 112; shareholders 76 equity-based compensation 274, 278 Erb, C 93, 94 estimates: fair value 201, 214–227; mark-tomodel 205, 206 Eucken, W 78 Europe: standard-setters in 106; taxes 253 see also taxes European Central Bank (ECB) 80, 85, 148, 149 European Commission 2015 82, 84 European Regulation 1606/2002 74, 79 European Securities and Markets Authority 49 European Union (EU): adoption of fair value accounting (FVA) in 73–88; fair value taxation in 254–258; founding principles of 83; International Financial Reporting Standards (IFRS) 74; political economy of FVA 75–77; social market economy 77–79; unemployment in 81 events, losses 144 excess volatility 6, 7, exchange rates, hedging 140–142 executive compensation 274–287; association between fair valued items and 276–278; disclosures 283–285; expenses 279–280; history of equity-based compensation 278; pay-for-performance 280–281; performance measures 275–276; trends 281–283 exit price 315–316 exit strategies 314, 320 exit values 34–37, 206 expected loss model 145–146 expenses, executive compensation 279–280 exposure, risk 168 extant literature, China 304 failures, fair value 11–12 fair value: accounting for expected losses 12–13; agendas 10–11; versus amortized cost 113–114; assets 50, 114–120, 131–133; bias of 199; business models 13–14; calculations 259; cash flows 37–38; and Conceptual Frameworks 25–40; consistency of 30; contracting usefulness of 305–306; debate 107–110; definition of 30, 216; disclosure requirements 45, 131; effect of taxes on 270–271; effect of taxes on investment decisions 258–265; entry values 34–37; estimates 201; evaluating quality of measures 129–130; evolution of xv; evolution of in China 297–302; excess volatility 9; exit values 34–37; failures 11–12; and financial crises 95–100; financial market hypothesis 289–290; and financial stability 7–10; 334 Index formation of financial market prices 288–295; fundamental misalignment 9–10; gambling for resurrection 8; hedge accounting 165–167; hierarchies 113; historical cost accounting (HCA) 292–293; history of measurements and 181–198, 182–184; introduction of 60; knowledge requirements 203–205; legal precedents 184–185; level 122, 181, 188–190, 203; level 181, 191–192, 203; level 181, 192–194, 203; liabilities 114–120; liquidity 10; loans 267; losses 81; management 202–203; and market prices 5–7; market prices over time 290–292; measurement 113–114, 120, 130–131; measurement when markets malfunction 91–105; non-recurring measurement 208–209; performance measures 275–276; pricing 142 see also prices; recurring measurement 205–208; revolution 289; risk 108; risk management 8–9; role of 25, 200–202; securities 45; shareholder protection 8; standards 47; studies (China) 307–308; taxation (in United States and EU) 254–258; three-level fair value hierarchy 214–227; three phases of 3–5; transactions 50; unsuitability of three-level fair value hierarchy 217–219; usage of 3–14; valuation of assets and liabilities 120–122; valuation usefulness of 304–305 fair value accounting (FVA) 41–55; adjusted market assessment approach 47–48; adoption in the European Union (EU) 73–88; applications of 67–68; bank risk management 136–154; borrowing 241–243; capitalism and 81–83; capital markets 239–241; China 296–311 see also China; compatibility with family firms 320–322; credit risk gains and losses 66–67; current market situation 316; dynamic loan loss provisioning 143–144; and earnings manipulation 306–307; economic crises 48–50; economic crisis (2008) 62–63; embedded options 65–66; evolution of standard-setting institutions 43–44; executive compensation 274–287; exit price 315–316; fairness of 199–213; faithfulness representativeness 50, 51–53; and family firms 312–330; in financial institutions 106–135 see also financial institutions; for financial instruments 60–62; financial reporting 236–239; financial statements 46–47; fundamental considerations with 235; hedging 140–142; history of 44–45; inflation 57–60; and the institutional environment (China) 302–304; internal controls 236–239; internal reporting 246–249; liabilities 68; macro hedging 142–143; management perspective of 231–252; market perspective 316; moderating role of in family firms 325–327; need for in family firms 323–325; operating decisions and strategies 243–246; political economy of 75–77; profits 269; and relevance 51; reliability in 320; restrictions to level 63–65; risk management in nonfinancial firms 155–177; rules 66; standardsetters 50–51, 56–72; stewardship 316–317; taxes 253–273; in today’s standards 47 fair value assets (FVA) 111 Fair Value Measurement see IFRS 13 ‘fair value option’ (FVO) 62 fair value through other comprehensive income (FVOCI) 113 fair value through profit and loss (FVTPL) 113 faithfulness representativeness 50, 51–53 Fama, EF 289 Fama and French 12-industry classifications 262 family firms: compatibility with FVA 320–322; current market situation 316; definition and key characteristics 317–320; exit price 315–316; exit strategies 320; and fair value accounting (FVA) 312–330; management 318–320; market perspective 316; moderating role of FVA 325–327; need for FVA in 323–325; reliability in 320; risk 319; stewardship 316–317, 321 Fan, J 303 Farley, A 307 FAS 115 187 FAS 133 187 FAS 157 187 FASB ASC Topic 820 130, 259 Federal Deposit Insurance Corporation (FDIC) 4 Federal Deposit Insurance Corporation Improvement Act (FDICIA [1991]) Federal Power Commission v Hope Natural Gas Company (1944) 184 Federal Reserve Bank 97, 200 Federal Reserve Board feedback 247 fiduciary responsibilities (of management) 232 Fiechter, P 109 Financial Accounting Standards Board (FASB) 10, 11, 25, 45, 48, 61, 93, 113, 298; disclosures 175; No 157 130; standards 62 financial crises: accounting rules and 140; Canada (2007) 49; consequences in the aftermath of 98–100; fair value and 95–100; measuring fair value 91–105 financial duress 160, 161 financial institutions: debate on fair value 107–110; fair value accounting (FVA) 106–135, 139–140; level financial instruments 122; level financial instruments 122–123; types of assets and liabilities 110–113 Financial Institutions Recovery, Reform and Enforcement Act (1989) 335 Index financial instruments 110, 234; derivatives 118–119; fair value accounting (FVA) for 60–62; fair value for 245; financial investments (available for sale) 119–120; level 122; level 122–123; measurement of 216 Financial Instruments: Recognition and Measurement 93 financial investments (available for sale) 119–120 financialization 73–75, 77 financial market hypothesis 289–290 financial market prices, formation of 288–295 financial reporting 25, 59, 82, 200; behavior 220–221; derivatives 155; fair value accounting (FVA) 236–239; hedging 155; illustrations 149–152; management 202–203; objective of 28–29; rules 215, 216, 222; Self-Determination Theory (SDT) 222–223; SFAC No 148 financial stability 107; accounting for expected losses 12–13; business models 13–14; excess volatility 9; fair value and 7–10, 10–11; fundamental misalignment 9–10; gambling for resurrection 8; importance of common measuring rods 11; liquidity 10; risk management 8–9; shareholder protection financial statements 25, 27, 32, 44, 45, 274–287; consequences of derivatives accounting 168–175; fair value accounting (FVA) 46–47; objectives of 52 financial system in Continental Europe 80 financing constraints 156 fire-sales 10 firm performance 77 First World War 188 Fisher, Irving 193 fixed assets 232 floors 118 forecasts, China 307, 308 foreclosure, lenders 242 foreign exchange derivatives 123 forward contracts 141 forwards 157 see also derivatives frameworks: Conceptual Frameworks 25–40; Goldilocks 28 Freixas, X 80 fundamental misalignment 9–10 future cash flows 37–38, 46 future contracts 141 futures 118, 157 see also derivatives FVTPL (fair value through the profit or loss statement) 147 GAAP (Generally Accepted Accounting Principles) 82, 84, 109, 121, 130–131, 214; calculating non-GAAP earnings 209; cash flow hedge amounts 170; difference between IFRS 83; disclosures 201; earnings and management expectations 204; fair value measurement 203; family firms 315; hedging 141; measurement of financial instruments 216; other comprehensive income (OCI) 233; reporting 149 gains 128; cash flow hedge 174–175; derivatives 165; fair value accounting (FVA) 66–67; hedging 172; recognition of 66 Galbraith, JK 73 Gallhofer, S 77 gambling for resurrection Gane, M 192 Gas & Electric Corp v California (1933) 184 Geczy, C 160 Generally Accepted Accounting Principles see GAAP (Generally Accepted Accounting Principles) Germany 4, 74, 77, 78 Giannini, P 80 global financial crisis (GFC 2007–2009) 137 globalization 75 Glossner, CL 78 Goh, BW 215, 219, 220 Goh, W 130 Goldilocks framework 28 Goldman Sachs 9, 63 Goncharov, I 262, 263, 264, 269 Gordon, Myron J 189 governance 130, 205 Gramm-Leach-Bliley Act (1999) 282 grants, options 280 Great Depression 4, 6, 41 Great Financial Crisis (GFC) 91 Great Recession 6, 74 Greece 49, 50 gross domestic product (GDP) 296, 297, 302 gross information asymmetry 96–98 Grossman, SJ 291 growth opportunities 160 Gu, F 53 Guay, W 168 Habib, A 307 Haddad, JR 79 Hanley, KW 208 Hanlon, M 280 Hart, O 100 Harvard University 280 Haslam, J 77 Hatfield, Henry R 184 Hayek, FA 290 Hayt, G 159 He, X 305 Healy, PM 202 hedge accounting rules 244, 245 hedging 140–142, 146; accounting 160, 164–168; benefits of 158–164; cash flow 142, 167–168, 336 Index 173–174; derivatives 147; with derivatives 158; examples of 161–163; financial reporting 155; gains 172; macro 142–143; market consequences of 175; premiums 169; versus speculation 163–164; timing differences with 170; ‘under-hedging’ 142 held-for-trading (HFT) book 61, 62 held-to-maturity (HTM) securities 112 Hellwig, M 100 Henry, E 208 hierarchies: fair value 113; measurement 91; three-level fair value 214–227; unsuitability of three-level fair value hierarchy 217–219 historical cost 29, 42, 57, 203, 240; China 307; liabilities at 140; measurements 107; stage (1992–1997) 298; taxes 260 historical cost accounting (HCA) 56, 57, 63, 65, 67, 68, 234; compensation 276; fair value 292–293 historical cost-based earnings 275 history: of equity-based compensation 278; of measurements and fair value 181–198 Hodder, LD 207 Hokins, PE 207 holding portfolios 161 Holmstrom, B 280 Hoogervorst, Hans 49 Hopper, T 80 HSBC bank 121; assets and liabilities 114–120; level financial instruments for 124–129 Hull, GL 185 Ihrig, J 168 Ijiri, I 57 illustrations 149–152 impaired loans 151 impairments 11, 30, 36, 41, 48, 64, 67, 112, 143, 144, 145, 151, 203, 204, 313 impairment losses 144, 151–152 incentives 94, 138 income statements 200; liquidation 237; volatilities 143 income taxes 254 see also taxes incurred loss model 145–146 inflation 56; accounting standards 60; current cost accounting (CCA) 56, 57–60; curves 123; options 118; swaps 118 influence, valuing investments 217–219 initial net investments (derivatives) 158 Institute of Certified Public Accountants (AICPA) 186 interest rates 217; gambling for resurrection 8; hedging 140–142; increases 200; swaps 118, 141 internal controls (FVA) 236–239 internal rate of return (IRR) 114 internal reporting 246–249 International Accounting Standard (IAS) 314; 39 106; IAS 93; IAS 16 186, 315; IAS 18 315; IAS 19 47, 219, 315; IAS 28 215, 218; IAS 32 92, 137, 315; IAS 39 61, 66, 93, 109, 110, 112, 113, 134, 141, 143, 144, 145, 147, 315, 325; IAS 41 48, 68, 315 International Accounting Standards Board (IASB) 10, 11, 13, 42, 61, 76, 91, 93, 106, 113, 222, 298; Conceptual Frameworks 25–40 see also Conceptual Frameworks; Discussion Paper (IASB 2013) 25, 36; dynamic risk management 143; Exposure Draft of 2015 25, 26, 28, 29, 30, 32, 36; hedging 141; standards 62 International Accounting Standards Committee (IASC) 5, 186 International Financial Reporting Standard (IFRS) 74, 130–131, 214, 314; China 300–302; China’s adoption of 296; difference between GAAP and 83; and fair value accounting (FVA) 81, 82; IFRS 278, 279, 315; IFRS 315; IFRS 315; IFRS 110, 134, 135, 137, 149; IFRS 47, 61, 112, 113, 135, 137, 141, 142, 146, 147, 234, 297, 315; IFRS 10 215; IFRS 13 68, 77, 82, 91, 92, 93, 109, 131, 135, 139, 181, 214, 215, 216, 217, 218, 231, 235, 259, 316, 322; IFRS 77 93; mandating in the EU 83, 84 International Monetary Fund (IMF) 80, 82 intervention 205 investment banks 136 investments 28, 108, 128; effect of taxes on investment decisions 258–265; opportunities 160 Investments in Associates and Joint Ventures (IAS28) 215, 218 investors 174–175 Israeli Securities Authority (ISA) 219 Italy, start of modern accountancy Jacob, M 262, 263, 264, 269 Jagolinzer, AD 208 Jai, Y 283 Jarolim, N 81 The Jobs and Growth Tax Relief Act of 2003 271 Johansson-Samuelson Tax 258, 259 Jorion, P 139 Journal of Accountancy 189 Journal of Accounting Research 189 Journal of Labor Economics 278 J.P Morgan 108, 283 Karakitsos, P 81 Keynes, John Maynard 7, 95 Kilic, E 169 King, AM 56, 57 337 Index Klein, P 265 Kolev, K 130 Lando, D 206 Landsman, WR 91, 279 Laux, C 63, 91, 108 laws, Sarbanes Oxley Act (SOX) (2002) 232 legal precedents, fair value 184–185 lenders, foreclosure 242 Lennard, A 38 Leone, AJ 276 Leuz, C 63, 91, 108 Lev, B 53 level (fair value) 122, 181, 188–190, 203 level (fair value) 122–123, 181, 191–192, 203 level (fair value) 123, 124–129, 181, 192–194, 203 Levi Strauss & Co 243, 244 Lévy, D 80 Li, Y 306 liabilities 26, 28, 47, 77, 98; categories of 112; changing values of 237; China 301; current cost accounting (CCA) 59; at current market values 139; designated at fair value 117–118; exit values 35; fair value 114–120; fair value accounting (FVA) 68, 106; GAAP 203; hiding 238; level (fair value) 188; loans and receivables (L&R) 111; market prices 107; ‘mark-to-market’ 106; measurement 137; measurement of 25; pensions 98, 99; prices 142; rules 140; taxes 254 see also taxes; trading 116–117; types of 110–113; valuation of 120–122, 238 Liao, S 138 Linsmeier, TJ 207 liquidation: assets 236; income statements 237; values 218 liquidity 7, 10, 63; premiums 9–10; taxes 254, 267–268 Lisbon Treaty 74, 77, 78, 83 Lisle, George 182, 184 Littleton, AC 57 Livne, G 277, 278 loan recovery rates 123, 124 loans 11, 13, 61, 111; commercial 238, 241; dynamic loan loss provisioning 143–144; fair value 267; fair value accounting (FVA) 241–243; impaired 151; losses 138, 151–152; repayment 241 loans and receivables (L&R) 61, 65, 111 Lobo, GL 138, 169 long-term orientation (LTO) 314, 318 losses 59, 128; accounting for expected 12–13; assets 36; cash flow hedge 172, 174–175; derivatives 165; dynamic loan loss provisioning 143–144; events 144; fair value 81; fair value accounting (FVA) 66–67; hedging 140–142; impairment 144, 151–152; loans 138, 151–152; measurement of credit 146; models 145–146; recognition of 66; risk management 145–146 Lou, F 306 MacKenzie, D 76 MacNeal, Kenneth 188 macroeconomic volatilities 160 macro hedging 142–143 Magnan, M 109, 207 Maino, R 218 management: background of 232–235; bank risk management 136–154; earnings 200, 202–203; earnings guidance 169; entityrelevance 33; family firms 318–320; financial reporting 202–203; perspective of fair value accounting (FVA) 231–252; risk see risk management Markarian, G 277, 278 market ‘exuberance’ 293 market perspective 313 market premiums 219 market prices 11, 94, 122; assets 107; China 304; fair value and 5–7; liabilities 107; risk management 8–9 markets: adjusted market assessment approach 47–48; capital 79, 239–241; crashes 63 see also financial crises; current market situation 316; earrings 233; economic crises 48; fair value measurement when markets malfunction 91–105; over-the-counter (OTC) 107, 123; perspective 316; volatilities 293; withdrawal from 96–98 ‘market selling (exit) price’ 313 market-to-myth measurement 304 marking-to-market 208 ‘mark-to-market’ 106 mark-to-model 205, 206, 304 Marris, R 94 Marshall, R 38 Marston, G 159 Martin, R 73 maturity 13 Maystadt, P 85 McLuhan, Marshall 42, 54 measurement: accounting standards 92–93; amortized cost 114; assets 137; of assets and liabilities 110; balance sheets 203; of credit losses 146; of derivatives 146; earnings management 202–203; evolution of fair value in China 297–302; fair value 113–114, 120, 130–131, 274–287; fair value accounting (FVA) 41; Fair Value Measurement, IFRS 13 77; fair value when markets malfunction 91–105; of financial instruments 216; financial reporting 202–203; hierarchies 91; historical cost 107; history of and fair value 181–198; knowledge requirements 203–205; legal 338 Index precedents 184–185; level (fair value) 188–190; level (fair value) 191–192; level (fair value) 192–194; liabilities 137; marketto-myth 304; methods (Great Depression) 41; non-recurring fair value 208–209; performance 275–276; P*Q 218; recurring fair value 205–208; role of fair value 200–202; rules 60; standard-setter trends 93–94; systems 82; value-at-risk measures 138, 139 medium-term misalignment Meeks, G 91, 97 Menini, A 109, 207 mergers and acquisitions (M&A) 203, 208 Merriman, N 81 Merton, R 65 Middle Ages Milan Stock Exchange 322 Miller, MH 76 Milne, A 277, 278 Minton, B 160 misalignment: fundamental 9–10; medium-term 6 mixed-attributes model 202, 207 models: banking 136; Black-Scholes 64, 67, 279, 285; Black-Scholes-Merton 65, 139; expected loss 145–146; incurred loss 145–146; loan loss 143–144; mixed-attributes 202, 207; Ohlson (1995) 305; valuation 53 Modigliani, F 76 Monet Carlo simulations 139 Montgomerie, J 73 Montgomery, Robert H 188 Moonitz, Maurice 189 Morgan Stanley 285 Morgenstern, Oskar 69 mortgage-backed securities (MBS) 92, 109, 122 mortgages 61, 111 motivation, roles of 221–222 movements, types of 125–127 Mussolini, Benito Nagar, V 284 Nanda, D 284 National Bureau of Economic Research 278 Neamtiu, M 208 Nelson, C 188 neoliberalism 75 net income, changes in 127–129 net present value (NPV) 259, 260, 261, 262, 263 net realizable value (NRV) 58, 59 net settlement amount (derivatives) 158 New York Stock Exchange (NYSE) 186, 238 Ng, J 130, 200, 215, 219 Nikolove, S 208 Nitzan, J 193 non-financial assets 204 non-financial firms: benefits of hedging 158–164; consequences of derivatives accounting 168–175; derivatives 156–158; hedging versus speculation 163–164; hedging with derivatives 158; market consequences of hedging 175; risk management in 155–177 non-hedge accounting 164 notional amount (of contracts) 157, 158 Nouy, Danièle 148 Noyes, Charles 189 Observable (prices, inputs, etc.) OECD (Organisation for Economic Co-operation and Development) countries 258 Ohlson (1995) model 305 oil embargoes 56 operating decisions and strategies 243–246 Öppinger, C 81 opportunities, profits 35 options 141, 157 see also derivatives; compensation 274; grants 280; inflation 118; stocks 161, 281; swaps 118 other comprehensive income (OCI) 61, 112, 127, 128, 129, 141, 142, 233, 234, 242, 245 over-the-counter (OTC) market 107, 118 see also trading owner-owner agency problems 318 Pacioli, Luca Palea, V 218 Parbonetti, A 109, 207 Paton, WA 57, 185 Paton, William A 184 pay-for-performance 280–281 Peasnell, KV 279 Pelger, C 93, 94 penalties: compensation 276 Penman, SH 37, 38 pensions 98, 99, 100 performance: measures 275–276; pay-forperformance 280–281; relative to investor expectations 243 performance share plan (PSP) 284 Petroni, KR 207 Piteco company 76 Pixley, Francis W 182, 188 Plantin, G 52, 107, 108 policies, reporting 220 political economy of FVA 75–77 Pope, PF 279 Portfolio Revaluation Approach (PRA) 143 post-implementation review (PIR) 222 Poterba, JM 265 Pound, J 283 P*Q measurement 218 premiums: hedging 169; liquidity 9–10; market 219 prepayment rates 123, 124 present value (PV) 58 339 Index prices: assets 27, 142; changes 156; compensation 276; exit price 315–316; exposure to fluctuations 159; fluctuation of 240; fluctuations (commodities) 244; formation of fair value 95–96; formation of financial market 288–295; hedging 140–142; liabilities 142; market 94; transactions 107 price time series 289 Prince, Charles 101 priori research’ 188 privatization (China) 302 Professionalism and Accounting Rules (West) 181 profits 278; cash flow hedge amounts 173–174; fair value accounting (FVA) 269; market prices 290; opportunities 35; taxes 254 property: prices 7; rights (China) 303 property plant and equipment (PEP) 277 Proposed Accounting Standards Update (2010) 64 Proudhon, PJ 82 provisioning, dynamic loan loss 143–144 public utilities 187 Qu, X 305 Rae, John 193 Regional, S 280 Rajan, R 81 Ramanna, K 52, 85 The Rate of Interest (Fisher) 193 recession (1990) recognition (of assets and liabilities) 110 regulations 73–75, 84, 85, 97; banks 136; behavior 221–222; controls 222; disclosures 149; political economy of FVA 75–77 relevance, FVA and 51 reliability: of fair value estimates 214–227; fair value taxation 267; in family firms 320 replacement assets 183 replacement cost 25, 35, 58, 183 reporting 200; assets 32; behavior 220–221; derivatives 155; earnings 236; fair value accounting (FVA) 42, 236–239; financial 25, 59, 82; hedging 155; historical cost 29; illustrations 149–152; internal 246–249; objective of 28–29; post-implementation review (PIR) 222; rules 222; SelfDetermination Theory (SDT) 222–223; SFAC No 148; systems that reflect management efforts 240 requirements, disclosures 216 Research and Development (R&D) 275, 276, 319 reserves 144 Residential Mortgage Backed Securities (RMBS) restricted stocks (RS) 274 retirement plans 68 return on assets (ROA) 140 returns 155; stocks 276; total shareholders’ return (TSR) 284 revaluation 44, 57, 60, 61, 143, 190, 204, 206, 220, 233, 253, 258 Revenue Act of 1913 184, 185 reviews (PIR) 222 revolution, fair value 289 Riedl, EJ 130, 207, 219 risk: aversion to 243; balance 243; bank risk management 136–154; compensation 275; credit 26; disclosures 110, 137 see also disclosures; exposure 161, 168; fair value 108; family firms 319; gauging current 107; increase of systemic xiv; perception of xiv; reports (Deutsche Bank) 149–150; returns 155; trading 139; value-at-risk measures 138, 139; write-downs 243 risk management 8–9, 100; benefits of hedging 158–164; consequences of derivatives accounting 168–175; derivatives 156–158; disclosures of practices 147–150; embedded derivatives 146–147; fair value accounting (FVA) 66–67; hedging 140–142; hedging versus speculation 163–164; hedging with derivatives 158; illustrations 149–152; losses 145–146; macro hedging 142–143; market consequences of hedging 175; in nonfinancial firms 155–177; strategies 140 roles: of accounting 291; of motivation 221–222 Roosevelt, Franklin D 4, 8, 278 Rope, W 78 Rorem, CR 185 rules: assets 140; capitalization of costs 275; fair value accounting (FVA) 66; financial reporting 215, 216; hedge accounting 244, 245; liabilities 140; measurement 60; reporting 222; traditional accounting 234 Rüstow, A 78 Ryan, SG 64, 95, 97 sales, assets 236 Sapra, H 52, 107, 108 Sarbanes Oxley Act (SOX) (2002) 232, 239 Savings and Loan crisis (1980s) 5, 8, 45, 91, 200, 201 Scandinavia 77 schedules, depreciation 235 Scholes, M 65 Schrand, C 160 Schuster, Michael 278 Schwarz, C 81 340 Index Scope Corporation AG 130 ‘Second Thoughts on Continuously Contemporary Accounting’ (Chambers) 191 securities: asset-backed 122, 125; availablefor-sale (AFS) 112; buying and selling 44; fair value 45; held-to-maturity (HTM) 112; mortgage-backed securities (MBS) see mortgage-backed securities (MBS) Securities & Exchange Commission (SEC) 42, 43, 44, 57, 63, 139, 208, 239, 283 securitization 119, 124, 149, 277 Self-Determination Theory (SDT) 221–222, 222–223 sensitivity of level valuations 129 Serafeim, G 130, 207, 219 settlement dates (derivatives) 158 settlements out of level financial liabilities 127 Sextroh, C 110 Shackle, George Shackleford, DA 265 Shakespeare, C 207 Shalev, RON 277 Shanghai stock exchange 300 shareholders: equity 76; protection shareholder value 73–75 Shenzhen stock exchange 300 Shevlin, T 280 Shiller, R 95, 101 Shin, HS 107, 108 Shin, Hyun 10, 52 short hedges 244 short-term accounting 237 short-term correlations 292 ‘short-term orientation’ 313 ‘smart’ packaging 277 Smithson, C 159 smoothing 138 Smyth v Ames (1898) 182, 183, 184 social market economy 74, 77–79 Southwest Airlines 169, 170, 171 Southwestern Tele Co v Missouri (1923) 183 Spatt, CS 265 Special Purpose Entities (SPEs) 238 speculation, hedging versus 163–164 stability 107 stakeholders 48, 83, 91 stand-alone derivatives 147 standard deviations 262 standardization, benefits of 28 standards see also specific standards: accounting 27, 32, 48, 53, 60, 92–93, 214; China Accounting Standards (CAS) 296, 297; fair value 47 standard-setters 28; algorithms 92; Conceptual Frameworks 27; dilemmas 50–51; drift from the accounting literature 185–187; economic crises 50; in Europe 106; evolution of 43–44; fair value accounting (FVA) 41–55, 56–72; guidance for 29; inflation 57–60; objective of financial reporting 28–29; trends 93–94; in the United States 106 Statement of Cash Flows 93 Statement of Financial Accounting Concepts (SFAC) 43; Concept 46; No 33, 34; SFAC No 148 Statement of Financial Accounting Standards (SFAS) 231; SFAS 107 60; SFAS 115 60, 204; SFAS 123 278, 279; SFAS 133 5, 65, 66; SFAS 139 66; SFAS 155 65; SFAS 157 92, 109, 201, 203, 205, 206, 207, 214, 231, 235, 315; SFAS 159 201, 205 statements: fair value accounting (FVA) 46–47; financial 25, 27, 32, 44, 45, 274–287; income 200, 237; objectives of 52 state-owned enterprises (SOEs) 298, 302, 303, 306, 309 Staubus, George J 193 Staubus GJ 45 Sterling, RR 45, 181, 190 stewardship 51, 101, 313, 316–317, 321 Stiglitz, JE 291 stocks 108; compensation 274; options 161, 281; returns 276 straight-line depreciation 232 strategies, risk management 140 Studener, W 81 Sun, H 307 Supreme Court (United States) 182, 183, 187 swaps 157 see also derivatives; credit default swap (CDS) 61, 119, 141; currency 141; inflation 118; interest rates 118, 141 swaptions 118 Sydney School 192 system risk, increase in 3–14, xiv Tax Accrual Index (Goncharov and Jacob) 262, 263, 264, 269 taxes 253–273; capital gains 117, 253, 265–266, 267, 268, 271; China 299, 300; compliance 266–267; effect of on fair values 270–271; effect of on investment decisions 258–265; Europe 253; liquidity restrictions 267–268; net present value (NPV) 259, 260, 261, 262, 263; profits 254; volatility of revenues 268–270 taxpayers 91 Tel Aviv Stock Exchange (TASE) 219 Tesco 284, 285 Tett, G 95 Texas 161 Thesaurus (Chambers) 192 341 Index three final Staff Positions (FSPs) 48 three-level fair value hierarchy 214–227 time, fair value market prices over 290–292 timing differences with hedges 170 tools, risk management 155 see also risk management total shareholders’ return (TSR) 284 trading 291; assets and liabilities 116–117; gains and losses 128; level financial instruments 122; risks 139; stocks 108 traditional accounting 233, 234 transactions 27, 42, 47; China 301; fair value 50; hedging 165 see also hedging; IFRS sharebased payment 68; mergers and acquisitions (M&A) 208; prices 107; uncertainty of 50 transfers: cash 111; out of level financial liabilities 127 trends: in executive compensation 281–283; standard-setters 93–94 true value 31 Tsomocos, D 80 Tweedie, David 106 UK National Lottery 63 UK Parliamentary Commission on Banking Standards 13 uncertainty, aversion to 243 ‘under-hedging’ 142 underlying (change in instrument values) 156, 158 Understanding Media: The Extensions of Man (McLuhan) 54 unemployment in the European Union (EU) 81 Uniform Agreement on Bank Supervisory Procedures United States: economic crisis (2008) see economic crisis (2008); fair value taxation in 254–258; standard-setters in 106; Supreme Court 182, 183, 187; taxes 253 see also taxes University of Freiburg 78 US Financial Crisis Inquiry Commission (FCIC 2011) 95, 96, 97 US Generally Accepted Accounting Principles (US GAAP) see GAAP US Treasury valuation 12, 98; of assets 120–122; definition of 6; dual 65; level financial instruments 123–124, 125–129; of liabilities 120–122; models 53; sensitivity of level 129; usefulness of fair values 304–305 value-at-risk measures 138, 139 values: of assets 52; entry 34–37; exit 34–37, 206; fair see fair value; liquidation 218; shareholder value 73–75; true 31; in use 25 Van der Zwan, N 76 Verrecchia, RE 265 Vinlar, Daniel 63 Visa, Inc 283 volatilities 123, 124, 217; cash flow 156, 158, 159, 160; creation of (asset value changes) 241; earnings 239–241; excess 6, 7; historical cost-based earnings 275; income statements 143; macroeconomic 160; markets 293; of tax revenues 268–270 voluntary fair value disclosures 130 Wahlen, JM 202, 207 Watkins, Sharon 238 Watts, RL 52, 57 Weber, M 73 Weil, Jonathon 199 Weinwurm, Ernest 189 Wells, MC 192 Wells Fargo 65 West, B 181 West Germany 78 see also Germany Williams, K 73 Wong, TJ 303, 305 World Trade Organization (WTO) 300 Wright FK 59 write-downs 240, 243 Wu, C 307 Wu, JS 276 Wysocki, P 284 Xu, C 296 Yang, H 307 Yeh, S 279 yields 123, 124 Yong, KO 130, 215, 219 Young, D 305 Yuan, H 306 Zeckhauser, RJ 283 Zeff, SA 93 Zhang, G 305 Zhang, H 207, 208, 265 Zhang, IX 277 Zhang, Y 277, 306 Zhu, K 307 Zimmerman, JL 57, 276 342 ... engaging and accessible foray into the complex world of fair value accounting. ’ Karen Nelson, Texas Christian University, USA The Routledge Companion to Fair Value in Accounting The concept of fair. .. Gilad, editor | Markarian, Garen, editor Title: The Routledge companion to fair value in accounting / edited by Gilad Livne and Garen Markarian Other titles: Companion to fair value in accounting Description:... perspectives, including a critical review of the merits and arguments against the use of fair value accounting; and explores fair value accounting in practice, involvement in the Great Financial Crisis,