“Does fair value accounting provide more useful financial statements for banks than current GAAP accounting?” by Dr. Yong Yu
Dr. Yong Yu
Associate Professor of Accounting
McCombs School of Business
The University of Texas at Austin
Standard setters generally contend that fair value accounting yields the most relevant measurement for financial instruments. This study empirically examines this contention by comparing the value relevance of banks’ financial statements under fair value accounting versus under current GAAP accounting, which is largely based on historical costs. We find that the combined financial statements (balance sheets and income statements) under fair value accounting are significantly less value relevant than those under GAAP. We next find that while fair value income statements are significantly less value relevant than GAAP income statements, fair value balance sheets are also marginally less value relevant than GAAP balance sheets. Further analyses show that the inclusion of transitory unrealized gains and losses drives the lower value relevance of fair value income statements, and that both divergence between exit value and valuein‐use and measurement error in fair value estimates contribute to the failure of fair values to provide more value relevant balance sheets. Overall, our results suggest that financial statements under fair value accounting provide relatively less useful information about banks to equity investors than financial statements under current GAAP.