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Article
Publication date: 1 June 2004

Timothy E. Jares and Angeline M. Lavin

Fair value pricing is a critical issue for mutual funds with international market exposure because trading in the underlying foreign securities is not synchronous with US…

Abstract

Fair value pricing is a critical issue for mutual funds with international market exposure because trading in the underlying foreign securities is not synchronous with US market trading. Using a sample of Japanese open‐end mutual funds that trade in the USA, this paper explores the potential for exploitation of common mutual fund pricing practices and identifies much larger pricing errors than previously reported. A simple, objective solution to the fair value pricing quandary is proposed. The solution, based on foreign exchange‐traded funds and the S&P 500, provides a timely, objective pricing alternative that is less exploitable than current mutual fund pricing practices.

Details

Journal of Financial Regulation and Compliance, vol. 12 no. 2
Type: Research Article
ISSN: 1358-1988

Keywords

Article
Publication date: 1 March 2001

ANTHONY S. EVANGELISTA and MARYBETH SORADY

Valuation of portfolio securities continues to hold the limelight in the arena of mutual fund regulation. For the last four years, mutual fund regulators have repeatedly…

Abstract

Valuation of portfolio securities continues to hold the limelight in the arena of mutual fund regulation. For the last four years, mutual fund regulators have repeatedly emphasized the need to adopt or revise procedures to address valuation issues that address modern market conditions resulting from such forces as globalization and the development of derivatives and other exotic securities.

Details

Journal of Investment Compliance, vol. 2 no. 2
Type: Research Article
ISSN: 1528-5812

Article
Publication date: 1 January 2003

David F. Freeman

Investment funds use actual trading market prices to value their portfolio investments where possible and “fair valuations” (estimated values) when actual market prices

753

Abstract

Investment funds use actual trading market prices to value their portfolio investments where possible and “fair valuations” (estimated values) when actual market prices are not available. The methods used to “fair value” portfolios recently have come under scrutiny. SEC inquiries and enforcement actions and shareholder lawsuits have revealed significant problems in the ways in which fair valuations of the portfolios of investment companies, as well as private investment funds are conducted. Congress and academic commentators are beginning to question fund valuation methods. Despite the importance of the issue to investors, there is little uniformity of practice among funds, no generally accepted means to conduct fair valuations, and little disclosure by funds of the methods by which fair valuations are conducted, who conducts them, when they are conducted, or how much fair valuation affects portfolio or unit valuations. The SEC has never conducted a public study or rulemaking, or issued a significant report on fair value practices. Instead, it is the stuff of a pair of short, 30‐year‐old SEC accounting bulletins and a few cryptic references in periodic revisions to Form N‐1A. Yet, in a letter the SEC staff sent to the Investment Company Institute (ICI) in April 2001, the SEC staff dramatically expanded the use of fair value pricing for use with securities for which actual trading market prices are available.

Details

Journal of Investment Compliance, vol. 4 no. 1
Type: Research Article
ISSN: 1528-5812

Keywords

Article
Publication date: 1 January 2005

Paul Kraft

To describe the application of fair value methodologies to fund operations and emphasize the importance of appropriate valuation procedures.

5637

Abstract

Purpose

To describe the application of fair value methodologies to fund operations and emphasize the importance of appropriate valuation procedures.

Design/methodology/approach

Discusses the need for appropriate valuation methodologies, describes a recent survey that shows how fair valuation policies and procedures have evolved over time, recommends procedures for adoption of consistent valuation procedures and industry practices, explains recent fund management trends such as the creation of separate valuation committees and the use of third‐party pricing vendors, and warns that valuation is becoming a more frequent subject of SEC examinations.

Findings

Concludes that investment companies, private investment companies, boards, and managements are re‐evaluating and updating their valuation policies and procedures, partly in response to increased focus on valuations by the SEC in its examinations.

Originality/value

Provides the results of a useful survey on fair value methodologies and important considerations for fund managers and directors as they review and update their valuation methodologies and procedures.

Details

Journal of Investment Compliance, vol. 6 no. 1
Type: Research Article
ISSN: 1528-5812

Keywords

Article
Publication date: 9 November 2015

Daniela Majercakova and Miroslav Skoda

The purpose of this paper is to examine and depict the advantages and disadvantages connected to the fair value, providing the reader with objective information and…

2913

Abstract

Purpose

The purpose of this paper is to examine and depict the advantages and disadvantages connected to the fair value, providing the reader with objective information and thorough insight into the problems and benefits of fair value. Partial objectives of this paper are to define the concept of fair value, to provide information about theoretical background and evolution of fair value and to examine and describe the possible future development of fair value.

Design/methodology/approach

Findings in the paper are based on study of existing literature and also on study using the open-ended approach of grounded theory, including 50 interviews and two group discussions with professional accountants dealing with the fair value accounting in practice.

Findings

According to the advantages and disadvantages of the concept of fair value in accounting, it is quite obvious and clear that this concept is far from being perfect. It is very difficult to determine whether its contribution to the improvement of accounting is really beneficial. Although the fair-value discussion seems to be far from over now, the current crisis provided an interesting setting to further explore these issues, understand them better and hopefully urge responsible institutions to fix the imperfections within the system to make it work correctly and more effectively.

Research limitations/implications

Because of the chosen research approach, the research results may lack generalisability. Therefore, researchers are encouraged to test the proposed propositions further.

Practical implications

This paper highlights that historical cost and fair value accounting must not be considered as competitors, as they serve different purposes. Knowledge of fair value is important, although it is not enough. Users also need to know the cost of the investment. In fact, knowing how much resources have been sacrificed to obtain that fair value, they could effectively evaluate stewardship. As a consequence, the adoption of a dual measurement and reporting system should be considered and discussed at a standard setting level.

Originality/value

This paper fulfils an identified need to study how fair value accounting can be useful in the future.

Details

Journal of Applied Accounting Research, vol. 16 no. 3
Type: Research Article
ISSN: 0967-5426

Keywords

Article
Publication date: 1 January 2001

CHIP VONEIFF and TONY EVANGELISTA

The daily valuation of portfolio securities can be one of the most onerous aspects of managing a registered investment company or mutual fund. The developing complexity of…

Abstract

The daily valuation of portfolio securities can be one of the most onerous aspects of managing a registered investment company or mutual fund. The developing complexity of securities combined with the increasing influence of foreign markets and nonexchange‐traded holdings have made the accurate pricing of securities difficult at best. Mutual funds typically rely on a myriad of sources to price their portfolio holdings, including domestic pricing services, broker‐dealers, foreign custodians or pricing agents, matrix pricing, fair value committees, or any combination thereof (see Exhibit). While the pricing function is typically delegated, fund management and the board of directors or trustees have the ultimate responsibility to ensure that appropriate pricing procedures and supervisory activities are in place.

Details

Journal of Investment Compliance, vol. 1 no. 4
Type: Research Article
ISSN: 1528-5812

Article
Publication date: 22 November 2011

Hong Nee Ang and Matthew Pinnuck

The purpose of this paper is to address the concern about the impact of accounting regulatory change pertaining to employee share options (ESOs) on earnings management…

1051

Abstract

Purpose

The purpose of this paper is to address the concern about the impact of accounting regulatory change pertaining to employee share options (ESOs) on earnings management. Following Australia's adoption of International Financial Reporting Standards (IFRS) in 2005, companies are required to recognise the fair value of ESOs as expenses. Due to inherent imprecision in the estimate of ESO's fair value, the regulatory change from disclosure to recognition was widely claimed to potentially give rise to an alternative mechanism to manage earnings. This study provides empirical evidence on whether the regulatory change leads to earnings management problems.

Design/methodology/approach

This study uses the regulatory change in accounting for ESOs to provide a direct test of earnings management between disclosed versus recognised regimes for the same sample of firms. The sample consists of Australian firms from S&P/ASX300 for the period from 2003 to 2006.

Findings

The results show that, although the accounting regulatory change from disclosure to recognition may provide an alternative earnings management vehicle, there is no evidence of this occurring. There could be several reasons for this finding. First, the statistical tests lack power. Second, there are stricter audit tests on recognised amounts than on disclosed amounts. Third, given the concern of excessive pay and the close scrutiny of compensation, managers may have already understated ESO values in the disclosure regime. Finally, managers have limited time and resources and the effort involved in the adoption of IFRS in 2005 could have restricted the time available to manage earnings via the ESO reporting channel.

Originality/value

This study adds to the limited research on whether a change in accounting regulation for employee share options from disclosure to recognition gives rise to greater scope for earnings management. One reason for the lack of empirical evidence in the research is due to the problem of designing a test. Bernard and Schipper suggest that within‐firm studies have limitations for comparing the effects of recognition versus disclosure when the change is driven by an estimate becoming more reliable. A cross‐sectional study is also problematic due to self‐selection bias if firms can choose between disclosure versus recognition. This study circumvents potential design problems raised by Bernard and Schipper by setting a test using regulatory change which allows the test to be compared directly using the same company.

Details

Pacific Accounting Review, vol. 23 no. 3
Type: Research Article
ISSN: 0114-0582

Keywords

Article
Publication date: 5 August 2014

Jap Efendi, Li-Chin Jennifer Ho, Jeffrey J. Tsay and Yu Zhang

The purpose of this paper is to examine whether firms manage the total value of stock option grants downward after the implementation of Statement of Financial Accounting…

Abstract

Purpose

The purpose of this paper is to examine whether firms manage the total value of stock option grants downward after the implementation of Statement of Financial Accounting Standards (SFAS) 123R to reduce their reported option expenses.

Design/methodology/approach

All Standard & Poor’s (S&P) 1500 firms with available stock option data in 2004 and 2006 are included in the analysis. The authors analyze if the total value of options granted, the per share fair value of options granted, the number of options granted as well as each individual input assumption have changed from the pre-SFAS 123R (i.e. 2004) to the post-SFAS 123R (i.e. 2006) period. We compare post-SFAS123R option pricing assumptions and per share fair value of options granted with their respective expected values to verify the results. We also analyze whether SFAS 123R has differential effects on firms which chose to disclose option expense only in footnotes (“disclosing firms”) versus firms which voluntarily recognized option expense (“recognizing firms”) prior to SFAS 123R.

Findings

The results show that after SFAS 123R, the total fair value of stock options granted for disclosing firms declined significantly. The decrease appears to result from managerial discretion over volatility and dividend yield assumptions as well as the reduction in the number of options granted. The evidence suggests that firms engage in not only assumption-based manipulations but also real activities to lower reported stock option expenses. It was also found that disclosing firms lower the total fair value of stock options granted to a greater extent than recognizing firms.

Originality/value

This study adds to prior literature that examines the opportunistic incentives for managers to use discretion in reporting stock option expenses. This study contributes to the earnings management literature by providing another example of manipulating earnings through real activities. Finally, our study should be of interest to regulators and investors.

Details

Review of Accounting and Finance, vol. 13 no. 3
Type: Research Article
ISSN: 1475-7702

Keywords

Article
Publication date: 12 October 2012

Robert Bricker and Nandini Chandar

The purpose of this study is to assess the pricing effects of financial reporting decision usefulness in terms of its constituent elements of relevance and reliability…

1319

Abstract

Purpose

The purpose of this study is to assess the pricing effects of financial reporting decision usefulness in terms of its constituent elements of relevance and reliability. Although it has long been intuitively appealing to believe in the decision usefulness of more relevant and reliable disclosures, they have been troublesome to demonstrate empirically. The mixed results have often been attributed to the richness of operating company settings.

Design/methodology/approach

This study addresses that problem by using 363 firm years of data from US market‐priced mutual funds (termed closed end funds in some countries and investment trusts in others), whose assets are comprised almost entirely of investment securities.

Findings

The results are consistent with the principal hypotheses – both relevance and reliability are valued by the market.

Practical implications

Overall, these findings provide a basis not only for reconciling prior, conflicting results, but in adding to our understanding of how disclosure characteristics are valued by investors, a particularly pertinent topic given the IASB's and the FASB's projects in this area.

Originality/value

The simplicity and elegance of the market‐priced mutual fund setting facilitates development of a model that simultaneously distinguishes between the relevance and reliability. Cost (less relevant) and fairvalue (more relevant) disclosures are gathered for both restricted (less reliable) and unrestricted (more reliable) securities for each firm year. Both levels and returns type methods are used to assess the effects of these separate elements of decision usefulness on securities valuation.

Article
Publication date: 30 September 2014

Vera Palea

This paper aims to discuss fair value accounting and its usefulness to financial statement users. The European Commission has recently endorsed IFRS 13 on fair value

9887

Abstract

Purpose

This paper aims to discuss fair value accounting and its usefulness to financial statement users. The European Commission has recently endorsed IFRS 13 on fair value measurement and is considering the endorsement of IFRS 9, which extends the use of fair value for financial instruments. Furthermore, fair value accounting has been under deep scrutiny because of its alleged role in the financial crisis. Therefore, the usefulness of fair value accounting is a key issue for standard setting purposes.

Design/Methodology/Approach

This paper delineates the theoretical background for fair value accounting, it provides empirical evidence on its usefulness, it highlights some controversial issues and makes some proposals for standard setting discussion.

Findings

Empirical research raises some doubts on fair value reliability. Furthermore, fair value accounting alone cannot provide information useful to evaluate stewardship. Historical cost is also needed. A dual measurement and financial reporting system could therefore deliver more complete and useful information to financial statement users.

Practical implications

This paper provides the reader with a comprehensive picture of the main issues related to fair value accounting and contributes to the standard setting debate on the optimal measurement system.

Originality/value

This paper reframes the debate on historical versus fair value accounting by explaining the reason why a dual measurement and reporting model should be implemented.

Details

Journal of Financial Reporting and Accounting, vol. 12 no. 2
Type: Research Article
ISSN: 1985-2517

Keywords

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