Changes in the measurement of fair value: Implications for accounting earnings

With the FASB's issue of staff position papers in 2009 and the relaxation of how fair value standards are applied, there has been a change in the practice of how fair value is measured. Since the FASB staff position papers in 2009, fair value measurement by financial institutions has increasingly relied on managerial assumptions. This study examines the impact of this change on the quality of earnings. Consistent with attribute substitution theory that emphasises reliability over relevance, we find that an apparent increase in managerial discretion in fair value measurement is associated with a higher probability of earnings management and lower earnings informativeness. The results indicate that allowing more managerial discretion in fair value measurement adversely affected the quality of financial reporting. Our study highlights the issue of reliable measurement in the debate among academics and practitioners of increasing the use of fair value accounting.