The decision usefulness of reported changes in fair values and fair value measurement-related disclosure for debtholders: evidence from Australian real estate industry

Pinprapa Sangchan, Haiyan Jiang, Md Borhan Uddin Bhuiyan*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

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.

Original languageEnglish
Pages (from-to)729-747
Number of pages19
JournalAccounting Research Journal
Volume33
Issue number6
DOIs
Publication statusPublished - 2 Dec 2020

Keywords

  • Cost of debt
  • Fair value
  • Fair value hierarchy
  • Information content
  • Investment property
  • Real estate industry

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