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Tatyana Ryabova

DBA Graduate - 2017

Thesis title

Fair Value vs. Historical Cost Accounting Measurements for Reporting Non-financial Assets: Does Fair Value Accounting Measurement Produce Higher Financial Reporting Quality?


Keji Chen
There is a dissonance between the views of the corporate community and accounting standards setters in regards to fair value accounting. The purpose of my research is to determine whether fair value accounting measurement produces higher financial reporting quality for reporting non-financial assets as the standard setters claim. I investigate if fair value (FV) produces higher financial reporting quality by examining earnings quality proxies. Based on the recent studies, there are three categories of proxies of earnings quality: properties of earnings, investor responsiveness to earnings, and external indicators of earnings misstatements.For the first proxy of earnings quality, I use "unexplained audit fees” (UAF) where larger values of the residual indicate lower financial reporting quality. The results show significantly higher average UAF of HC firms than that of FV firms, which suggest that FV firms have a higher financial reporting quality than HC firms do. However, the above finding is not supported when earnings persistence is used as another proxy for earnings quality. Further, I use the earnings response coefficient (ERC) as a second proxy for earnings quality, which measures the investor responsiveness to earnings. ERC of the earnings per share show a much higher number in FV firms versus HC firms, which means that the earnings per share numbers in FV firms could contain more useful information than in HC firms. Finally, I investigate if FV produces the higher financial reporting quality by looking at the third proxy of earnings quality: financial restatements. The results indicate that there is a statistically significant association between HC and FV measurements and restated and non-restated financial statements.Although both FASB and IASB stress the importance of high-quality financial reports, one of the key problems found in prior literature and my research is how to define and measure financial reporting quality.According to the recent research, the corporate community has limited support for FV and prefers HC. While FV is viewed as “more-up -to-date”, the findings of my research indicate that FV is not producing the higher earnings quality leading to higher financial reporting quality across all three proxies of earnings quality.Since the European firms could switch from HC to FV, following mandatory IFRS adoption in Europe on 1/1/2005, it provides a good groundwork to measure financial reporting quality of two sets of firms that has not been done in prior literature.Keywords: Fair value, historical cost, audit fees, ERC, and restatements.