Departmental Bulletin Paper 〈査読付論文〉The Necessity to Advance Disclosing Fair Value by the Hierarchy: Evidence from Literature Review about Fair Value Hierarchy Information

ZHANG, JIAO

62 ( 3 )  , pp.149 - 172 , 2016-03-25 , 近畿大学商経学会
ISSN:04502825
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[Abstract]This paper aims to discuss the necessity to advance disclosing fair value by hierarchy in Japan by reviewing the literature about fair value hierarchy information in the U.S. In Japan, ASBJ published the Exposure Draft "Accounting Standards on Fair Value Measurement and Disclosure" in 2010 which specifies that the fair value should be reported by hierarchy. However, it has not published as formal standard until March 2016. Furthermore, some commenters suggested that the hierarchy and estimation process of fair value should not be disclosed because of the heavy cost. However, by surveying the empirical results, it is evident that the fair value from market (Level 1)is significant different from the fair value based on manager’s valuation (Level 3). For example, those empirical results suggest that valuation multiples on mark-to-model estimates are generally lower than those based on unadjusted market prices. Further, by the literature review, it is even known that there is some evidence revealing that managers appear to manipulate the fair value estimates of Level 3. Furthermore, these results show that fair value assets, especially those measured using Level 2 and Level 3 inputs, are negatively related to analysts’ information quality and positively related to forecast dispersion and absolute forecast errors. Because of these differences, disclosing the fair value without the hierarchy will make the fair value less transparent and less reliable. Overall, from the views of decision usefulness and avoiding the discretionary behavior by manager, this paper concludes as follows. First, it should be accelerated to practice the ASBJ Exposure Draft "Accounting Standards on Fair Value Measurement and Disclosure." Second, objecting to the comments suggesting unnecessity of the disclosure of hierarchy and estimation process of fair value, this paper concludes the disclosure is indispensable.
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