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The Effect of Fair Value PDF
The Effect of Fair Value PDF
Abstract
This study aims to examine the effect of the fair value of financial assets in
increasing informations content of banks future earnings after mandatory
adoption of PSAK 50&55 (Revised 2006), Financial Instruments: recognition,
measurement, and presentation in banking industry in Indonesia. Financial assets
(FVFA) used in this study are classified into fair value through profit or loss
(FVTPL), available for sale (AFS), held to maturity (HTM), and loans and
receivables (LNR). This study uses 138 bank year samples that are listed in
Indonesia Stock Exchange for 2006-2012 periods. Using common panel data
analysis, the results show that informations content of banks future earnings is
increase after mandatory adoption of PSAK 50&55 (Revised 2006), but the use of
the fair value of financial assets reduce the increasing of informations content of
banks future earnings. This result suggests that banks current earnings ability to
predict future earnings is increase after mandatory adoption of PSAK 50&55
(Revised 2006). But the use of the fair value of financial assets reduces banks
current earnings ability to predict future earnings. The financial asset that is
classified as available for sale (AFS) may contribute to this reduction of
informations content of firms future earnings after the mandatory adoption of
financial instrument standards in Indonesia.
Keywords: Fair value of financial assets, international accounting standards on
financial instrument, fair value through profit or loss, available for
sale, hold to maturities, loans and receivables, FERC.
Abstrak
Penelitian ini bertujuan untuk menguji pengaruh penerapan nilai wajar aset
keuangan terhadap kemampuan investor dalam menilai kandungan informasi laba
masa depan sesudah adopsi wajib PSAK 50& 55 (Revisi 2006). Studi ini
menggunakan 138 bank yang terdaftar di BEI periode tahun 2007-2011 sebagai
sampel. Aset keuangan (FVFA) yang digunakan pada penelitian ini adalah efekefek yang dimiliki bank yang dikategorikan menjadi fair value through profit or
loss (FVTPL), available for sale (AFS), dan hold to maturities (HTM), serta loans
and consumer receivables (LNR). Data dianalisis dengan analisis data panel
pendekatan commom. Secara umum, hasil penelitian menunjukkan bahwa terjadi
peningkatan kandungan laba masa depan setelah adopsi wajib PSAK 50 & 55,
namun penggunaan nilai wajar aset keuangan menurunkan peningkatan
kandungan laba masa depan setelah adopsi wajib PSAK 50 & 55. Komponen
tersebar yang mungkin menyebabkan penurunan kandungan laba masa depan
setelah adopsi wajib PSAK 50 & 55 adalah aset keuangan yang tergolong
available for sale (AFS).
Kata Kunci:
Introduction
Many studies had examined the value relevance of fair accounting information
period.
The
group
of
financial
assetsin
this
study
is
fair
LiteratureReviews andHypothesisDevelopment
The general objective of international financial reporting standards (IFRS) is
providing useful information for users (the existing and potential investors) by
providing relevant information to help investors making investments decision. If the
information that available in the market is the relevant to investors, it will drive
investors to create trading transactions in the market. One of the relevant information
that will be used by investor is earnings and according to Landsman, et al.,(2012), the
value relevance of earnings increases after the adoption of IFRS.
Several studies show the increasing in value relevance of earnings after IFRS
adoptions period (Landsman, et al., 2012; Papadamou&Tzivinikos, 2013; Duh, et al.,
2012), due to IFRS encourages the practice of relevance and transparency in financial
reporting by providing adequate disclosures. Relevant information will be used by
market to assess future company's risks and performance, thereby increasing the content
of the company's future earnings (Ettredge, et al., 2005). Based on above arguments, the
first hypothesis statement (H1) is as follows:
H1:
the informations content of firms future earnings will increase after mandatory
adoption of PSAK 50 & 55 (Revised 2006) which had been convergent into
international accounting standards.
PSAK 50 & 55 (Revised 2006) classify financial assets into four categories,
namely fair value through profit or loss (FVTPL), held-to-maturity investments (HTM),
loans and receivables (LNR), and available-for-sale (AFS). The four categories of
financial assets are measured at fair value in the general meaning.
At the initial recognition, the financial instrument is measured at fair value plus
transaction costs except for financial instruments that are measured at fair value.
Recognition at post-acquisition, financial assets that are categorized as FVTPL and AFS
are measured at fair value, while the HTM and LNR are measured at amortized cost by
using effective interest rate. Any changes in the fair value of FVTPL category will be
recognized in profit or loss, while the AFS category is recognized in equity.
Amortization of interest using the effective interest method for HTM and LNR category
will be recognized in profit or loss. Similarly, if there is a declining in fair value of the
four categories of financial assets will be recognized in profit or loss.
The use offair valueinfinancial assetsset outin more detail, especiallyregarding
thefair valuequotationsthat usedto help investors in capital market when assessingthe
riskexposure andperformance ofthe financialassetsowned bybanks. However, the
differences of measurementandrecognitionoffourtypesof financialassetshave different
impactonprofit and loss, so itis difficult to determinewhichone of financialassetsthat
have ability to increase thevalue relevance of earnings information for investors.
Previous research has shown that the use of fair value of financial assets
increasing the volatility of bank earnings (Duh, et al., 2012). Earnings volatility may
reflect the risk exposure that is faced by banks due to of financial assets that owned by
banks, therefor it is easier for investors to assess risks exposure of the financial assets.
However, Duh, et al.,(2012) failed in providing empirical evidence regarding the use of
fair value in financial assets that is positively related to value relevance of bank
earnings risk. Similarly, Nelson (1996) failed to provide empirical evidence of the
ability of fair value in increasing the value relevance of accounting information after
adoption of PSAK No.107.
Therefore, although theuse offair valueinfinancial assetsis intendedtoincrease
thevalue relevanceof accountinginformation(earnings), it is difficult to determine the
differences or the similarities of the impact ofthe use offair value of each types of
financial assetsonbanks informationcontent of future earnings. Thus, itis difficult to
determinewhether the use offair valueinfinancialassetsmayincreaseordecrease theability
ofthe markettoassessfuture riskandbankperformance(FERC) after mandatory adoption
of PSAK50&55(Revised 2006) in current earnings whichin turn willdrive the
marketinvestment decisions making process. Based ontheabovearguments, it is stated
secondhypothesis(H2) as follows:
H2: After the adoption of PSAK 50 & 55 (Revised 2006), the use of fair value in
financial assets will increase (decrease) the informations content of firms future
earnings.
3. Research Design
3.1 Samples
This study uses publicly listed commercial banks in Indonesia Stock Exchange
period 2007-2011 as samples. The banking industry is chosen due to large portion of
their assets are financial assets. The final samples are 138 observations (firm years) is
presented in Table 3.1 (see appendix).
Data analysis use unbalanced common data panel. Financial statements of
commercial banks in 2006-2012 periods were obtained from the Center for Business
and Economic Database of Economic Faculty of Universitas Indonesia. The financial
statements from 2006 were used to obtain earnings and number of shares outstanding
data prior to the current period (t-1), while the financial statements in 2012 were used to
obtain earnings data for the next after current year (t +1). Monthly stock price data were
obtained from Bloomberg database.
7,+8,+9,+1,+
10,+1,+11,+1,+12,+1,+13,+
1,+14,+1,+15,+1,,+16,+1
,,+17,+1,,+18,+1,
(3.2)
, +,
Explanation:
,
: The annual stock return for year t, measured over the 12-month period
ending three months after the firms fiscal year-end.
,+1
: Income before extraordinary items for the year following year t; deflated
by market value of the equity three months after the year t-1 fiscal yearend.
,1
Income before extraordinary items for the year preceding year t; deflated
by market value of the equity three months after the year t-1 fiscal yearend.
: Percentage of fair value of available for sale (AFS) to total assets of bank
i period t.
: 1 in each of the years since PSAK No. 50&55 (Revised 2006) was
mandatory adopted (2010-2011); 0 for preceding years before
implementation periods (2007-2009).
H1 cannot be rejected if the value of tstat>t table for 7 coefficients in equations 3.1 and
for 9 the equation 3.2 is positive and significant, while H2 cannot be rejected if the
value of | t stat/2 |>| t
tabel/2 |
Variables
3.3.1
price cannot be separated from study of Ball & Brown (1968). BB study shows
earnings announcement affect stock prices. The study has been evolved a lot and one of
them is examining the future earnings response coefficient (FERC). This study adopts
the measurements of Ettredge, Kwon, Smith, &Zarowin (2005) to measure markets
ability to anticipate future earnings (FERC), but does not include returns in the prior
period (t-1) because of data unavailability for some samples. The basic model of the
FERC in this study is as follows:
= + 0 1 + 1 + 2 +1 + (3.3)
Model 3.3 aims to examine the market expectation of future earnings that is
implied in stock price for the period. If the market has a positive expectation regarding
the realization of future earnings, the stock returns for the period will be related to
future earnings. Thus, coefficient 2 is a coefficient for FERC is expected to be positive
(Ettredge, et al., 2005).
Model in equations 3.1 and 3.2 are used to examine the effect of the fair value of
financial assets on the informations content of firms future earnings or future earnings
response coefficient (FERC) after mandatory adoption of PSAK 50 & 55 (revised
2006). The both models were derived from model 3.1. Mandatory adoption of PSAK 50
& 55 (revised 2006) for the banking industry is effective on January 1, 2010. Dummy
variable, POST is given a value of 1 if the observation period after mandatory adoption
international
accounting
standardscannot
interactionbetweenFERCandPOSTvariablesis
be
rejectedif
significantly
the
coefficient
positive.
4. Data Analysis
4.1 Descriptive Statistics and Correlation Between Variables
Based on the minimum, maximum, and standard deviation in Table 4.1 (see
appendix) datas distribution for current and next period of earnings are relatively large.
The average financial assets which are measured using fair value are 58.02% of banks
total assets. The largest composition of banks financial assets is financial assets
recognized as fair value through profit or loss (FVTPL), which is 16.46% of the banks
total assets. It is followed by loans &receivable (LNR), held to maturity (HTM), and
available for sale (AFS) which respectively each mean value are 7.08%, 6.35%, and
3.66% of banks total assets.
Table 4.2 (see appendix) shows the correlation between variables as an initial
indication of relationship between variables in this study. Current earnings variable is
significantly positive correlated with prior period earnings and significantly negative
correlated with earnings in the next period. This result suggests that there is realization
of earnings in the current period (Et) and the previous period (Et-1) in the period after
current period (Et+1). The three categories of fair value of financial assets (AFS, HTM,
and LNR) significantly positive correlated with the total fair value of financial assets
(FVFA), but FVTPL is not significantly correlated with total fair value of financial
assets. This result indicates that the characteristic of fair value of FVTPL is relatively
different compared to the three other categories of financial assets. All earnings
variables are not significantly correlated with the return variable.
financial assets reduce information content of future banks earnings after mandatory
adoption of PSAK 50 & 55 (Revised 2006). The results of this study support the
hypothesis 2 as well as providing empirical evidence that the use of fair value of
financial assets after mandatory adoption of PSAK 50 & 55 (Revised 2006) generally
reduces the information content of bank's future earnings or markets ability to
anticipate future earnings.
The empirical evidence supports the argumentation that the use of fair value
increase unrealistic earnings volatility, so investors respond it negatively (Duh, et
al.,2012). This argumentation is strengthen by empirical evidence in Table 4.3 (see
appendix) that shows the fair value of financial assets (FVFA) variable is significantly
negative at alpha 5 % (two tails test). Implication of empirical evidence in model 1 is
providing general information that investors view the adoption of international
accounting standards increase the value relevance of earnings to help them in making
investment decisions.But, the use of fair value in financial assets can increase unrealistic
earnings volatility that responded negatively by investors, thus lowering the
informations content of futures earnings. This could be due to investors' difficulties in
assessing risks exposure for the use of the fair value of financial assets, so lowering the
use this information to assess the banks future performance.
To explore the difference responseof investors to the four types classifications
offinancial
assets,
table
4.3showsthatonly
theinteraction
coefficient
namely
the
interaction
ofEt+1*FVTPL*POST,
Et+1*HTM*POST,
ofthe
coefficient
ofinteractionvariableof
Et+1*AFS(-3.84907000)
and
(FVTPL)category is much larger than the other three categories. It is 16.46 % ofbank
total assets. The proportion of the use of three other categories of fair value of financial
assets: loans and receivable (LNR), held to maturity (HTM), and available for sale
(AFS) are respectively only 7.08%, 6.35 %, and 3.66 % of banks total assets.
Thus, finding of model 2 strengthen the empirical findings of the first model,
that are: (i) there is increasing of the informations content of firms future
earnings(FERC) in the period after mandatory adoption of PSAK 50 &55; (ii) the use of
the fair value of the financial assets reduce the informations content of firms future
earnings(FERC) in the period after mandatory adoption of PSAK 50 and 55 are
probably caused by the impact of the use of fair value in financial assets will increase
unrealistic earnings volatility; (iii) the largest component that may reduce the
informations content of firms future earningsin period after mandatory adoption of
PSAK 50 & 55 is the use of the fair value of fair value through profit or loss (FVTPL)
category.
The implications of this study for regulator (accounting standard board and
capital market regulator) is providing information to socialize and educate about the use
of fair value in financial assets, so that investors will have better understanding
regarding the information content due to the use of fair value of financial assets which
can be used to assess the future risk and earnings performance.
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Appendix
Total
32
5
160
(15)
(7)
138
Mean
Rit
Median
Maximum
Minimum
Std. Dev.
0.018808 0.014177
0.167647
-0.06366
0.03943
Et-1
0.260322 0.130588
3.216342
-1.085357
0.78021
Et
2.319447 0.07493
162.0616
-13.84371
15.05179
Et+1
0.673217 0.095342
72.64901
-149.6612
15.93275
FVFA
0.580219 0.601554
0.789085
0.152242
0.12272
FVTPL
0.164652 0.10716
1.809992
0.004817
0.189091
AFS
0.036673 0.004572
0.362363
0.071527
HTM
0.063559 0.022112
0.737517
0.105989
LNR
0.070855 0.023672
0.489085
0.098897
Observations
138
138
138
138
138
Rit
Et-1
Et-2
FVTPL
AFS
HTM
LNR
FVFA
Et-2
FVTPL
AFS
HTM
LNR
FVFA
1
0.011894
0.137695
Et
Et
1
-----
0.078181
0.201998
0.907786
2.387512*
-0.033992
-0.021291
-0.197163
-0.393718
-0.246517
-2.328024*
-0.001017
-0.057006
-0.016509
0.017135
-0.011775
-0.660964
-0.191131
0.198385
0.105689
-0.006249
-0.026224
0.020573
-0.168303
1.230332
-0.072335
-0.303664
0.238204
-1.976438
-0.062587
-0.098238
-0.036979
0.032361
-0.202519
-0.077794
-0.725915
-1.142711
-0.42835
0.374803
-2.393932*
-0.903264
-0.035449
0.10721
-0.01545
-0.062494
-0.383019
-0.225702
-0.163704
-0.410614
1.248242
-0.178873
-0.724841
-4.799801*
-2.681896*
-1.920923*
0.00989
-0.014614
-0.051031
-0.007685
-0.075098
0.483392
0.2989
0.34794
0.114493
-0.169182
-0.591494
-0.088968
-0.871789
6.392104*
3.625771*
4.296133*
-----
1
----1
----1
----1
----1
----1
-----
Model 2
Variables
Coefficient
t-Statistic
Prob.
C
Et-1
Et
Et+1
0.02544500
0.03992300
0.00006540
0.00009060
0.03257200
0.00018200
0.00041500
0.00142500
0.00150400
2.43453400
14.66018000
0.44599500
0.64953200
0.01630000
0*
0.65630000
0.51710000
-1.81989000
0.04056400
0.52048700
1.85874500
0.0711***
0.96770000
0.60360000
0.0653***
-1.93443300
0.0552***
FVFA
Et+1*FVFA
POST
Et+1*POST
Et+1*FVPA*POST
Coefficient
t-Statistic
Prob.
0.00439300
0.03768600
0.00005870
0.00027400
0.88215800
4.95700500
0.49402600
2.51113800
0.37950000
0*
0.62220000
0.0134*
0.00021900
0.86907000
0.29349200
4.02905900
0.76970000
0.0001*
FVTPL
AFS
HTM
LNR
-0.24052000
0.24745000
0.18968600
0.26552500
Et+1*FVTPL
-0.85504200
Et+1*AFS
-0.61513000
Et+1*HTM
-0.85092300
Et+1*LNR
-0.87419100
Et+1*FVTPL*POST
Et+1*AFS*POST
-0.08625700
0.20757800
Et+1*HTM*POST
-0.26535100
Et+1*LNR*POST
-0.00703200
Adjusted R-squared
F-statistic
Prob(F-statistic)
0.60703500
27.45393000
0.00000000
3.64695200
3.28938700
3.15971800
4.00638700
3.81061300
3.84907000
3.95267600
4.04620400
1.72901000
3.68126600
3.74732500
2.68370400
0.0004*
0.0013*
0.002*
0.0001*
0.0002*
0.0002*
0.0001*
0.0001*
0.0864***
0.0003*
0.0003*
0.0083*
0.60862000
13.53196000
0.00000000
Durbin-Watson stat
2.38127300
2.40651300
, is the annual stock return for year t, measured over the 12-month period ending three months after the
firms fiscal year-end. ,1 , , , dan ,+1 are respectively income before extraordinary items for the year t1, t, and t+1 deflated by market value of the equity three months after the year t-1 fiscal year-end. Total fair
value of financial, , sum of fair value through profit or loss (FVTPL), available for sale (AFS), hold to
maturities (HTM), and loans and receivables (LNR). All financial assets variables are deflated by current
period of banks total assets. POST is dummy variable; 1 in each of the years since PSAK No. 50&55 (Revised
2006) was mandatory adopted (2010-2011); 0 for preceding years before implementation periods (2007-2009).
*,**,** significant at alpha 1%, 5%, or 10%; one or two tails test.