The decision usefulness of reported changes in fair values and fair value measurement-related disclosure for debtholders: evidence from Australian real estate industry
ISSN: 1030-9616
Article publication date: 20 October 2020
Issue publication date: 2 December 2020
Abstract
Purpose
This paper aims to examine the information content of changes in fair values of investment property reported under international accounting standards (IAS) 40 and International Financial Reporting Standards (IFRS) 13 to debtholders. This study further examines the effect of fair value hierarchy inputs, valuer types and the quality of fair value measurement-related disclosure on the information usefulness of changes in fair value.
Design/methodology/approach
This paper performs a panel regression on the cost of debt capital and changes in fair value of investment properties, and fair value measurement features using data covering periods 2007–2015 from Australian real estate companies.
Findings
The findings suggest that changes in fair value of investment property are informative about the real estate firm’s future cash flow to debtholders. Also, the findings show that the use of unobservable inputs in an active market (Level 3 inputs) and Level 2 has no different impacts on the cost of debts. Also, this paper documents that employing the directors solely in valuation may lead to a higher cost of debts. Furthermore, this paper reports that an extensive fair value disclosure appears no additional value in the debt decision.
Originality/value
Collectively, the findings indicate that although the use of unobservable inputs is common in the real estate sector, information on the changes of the fair value of investment properties are informative to debtholders. The findings have important implications for accounting standard setters to consider revisiting the IAS 40 and IFRS 13 on whether the independent valuation should be required and whether the extensive disclosure requirement is worthwhile.
Keywords
Acknowledgements
The authors are immensely grateful for helpful comments received from Steven Low, Michael Bradbury and participants of the 2018 Journal of Contemporary Accenting and Economics (JCAE) Doctoral Consortium and Annual Symposium, and the 2017 Quantitative Accounting Research Network (QARN) meeting held at Auckland University of Technology. They also acknowledge Sumana Punpongsanon for sharing her audit experience in the real estate industry. This paper is based on the PhD thesis of Pinprapa Sangchan at Massey University, New Zealand.
Citation
Sangchan, P., Jiang, H. and Bhuiyan, M.B.U. (2020), "The decision usefulness of reported changes in fair values and fair value measurement-related disclosure for debtholders: evidence from Australian real estate industry", Accounting Research Journal, Vol. 33 No. 6, pp. 729-747. https://doi.org/10.1108/ARJ-11-2019-0222
Publisher
:Emerald Publishing Limited
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