Commercial lender judgments and fair-value recognition: an investigation into the impact of future accounting standards
ISSN: 1321-7348
Article publication date: 9 November 2020
Issue publication date: 20 January 2021
Abstract
Purpose
This paper examines the impact that fair-value recognition of non-financial assets has on the judgments of commercial lenders.
Design/methodology/approach
Commercial lenders, who were attending a national banking conference, participated in a controlled experiment.
Findings
The experimental results show that commercial lenders incorporate fair values into their judgments but only when this information is recognized (vs disclosed) on the financial statements. Additionally, lenders assigned the highest loan interest rates when recognized fair values increased net income, and they assign the lowest loan amounts when recognized fair values decreased net income.
Research limitations/implications
Typical limitations regarding behavioral experiments are acknowledged in the paper. For example, the commercial lenders in this study could not request additional information. In addition, because of the difficulty in obtaining these participants, the sample size is relatively small.
Practical implications
US Generally Accepted Accounting Principles (GAAP) does not allow the fair-market valuation for most non-current assets while International Financial Reporting Standards (IFRS) require such valuations. The article adds to our understanding about how a significant user group of financial statements, commercial lenders, view GAAP and IFRS accounting.
Social implications
This article provides insights regarding how commercial lenders' decisions may change based on accounting principles related to asset valuation. Obtaining credit through loans has significant implications for society.
Originality/value
This article is unique because it examines commercial lenders' judgments using different asset valuations on the financial statements.
Keywords
Acknowledgements
The author would like to thank Christine Botosan, Martha Eining, Robert Allen, Frank Drews, John Kircher and Kathryn Kadous for all of their helpful comments. The author is grateful to Brooke Elliott and Marlys Lipe for sharing their experimental questions with me. The author would like to thank workshop participants at the University of Utah, Oklahoma State University, Miami University and the University of Nevada—Las Vegas for their helpful comments.
Citation
Warne, R.C. (2021), "Commercial lender judgments and fair-value recognition: an investigation into the impact of future accounting standards", Asian Review of Accounting, Vol. 29 No. 1, pp. 1-18. https://doi.org/10.1108/ARA-02-2019-0057
Publisher
:Emerald Publishing Limited
Copyright © 2019, Emerald Publishing Limited