Relevance of supplementary fair value disclosures under market uncertainty: effects on audit fees and investors’ pricing
ISSN: 0268-6902
Article publication date: 7 February 2022
Issue publication date: 1 September 2022
Abstract
Purpose
Concerns relating to the representational faithfulness and, consequently, the relevance of fair value (FV) estimates are likely to be heightened in the wake of market uncertainty caused by the COVID pandemic. Therefore, this paper aims to study the relevance of supplementary disclosures intended to improve the representational faithfulness of FV estimates by examining their impacts on audit fees and investors’ valuation of FV adjustments in the uncertain market condition of 2020.
Design/methodology/approach
The sample is comprising Australian real estate firms. The authors develop both weighted and unweighted disclosure indices based on supplementary disclosures related to Level 3 FVs under IFRS 13 Fair Value Measurement. The authors measure the levels of disclosure by the sample firms based on these indices from 2018 to 2020 and ascertain their effects on audit fees and the market value of FV adjustments on investment properties.
Findings
The authors find that real estate firms increased supplementary FV disclosures during 2020. The authors document a negative association between supplementary disclosures and audit fees, although the authors find no incremental impact of disclosures on audit fees during the pandemic. Additionally, the authors find that investors’ pricing of FV adjustments increased with the increase in disclosures during the market uncertainty of 2020, while in the pre-uncertainty period, their pricing influence was not significant.
Originality/value
The findings extend the understanding of the role of supplementary disclosures on Level 3 investment properties in mitigating the perceived audit risk for auditors and the faithful representation concerns for investors in a distressed market environment.
Keywords
Acknowledgements
This paper is based on the work completed in Laura Mehnaz’s PhD dissertation at Auckland University of Technology (AUT). The authors gratefully acknowledge the helpful comments from Steven Cahan, Ahsan Habib and Tom Scott and participants at the 2021 Quantitative Accounting Research Network (QARN) Symposium and Early Career Researchers Support Network (ECRSN) Symposium. Laura would like to acknowledge the financial support from the AUT.
Citation
Mehnaz, L., Rahman, A. and Kabir, H. (2022), "Relevance of supplementary fair value disclosures under market uncertainty: effects on audit fees and investors’ pricing", Managerial Auditing Journal, Vol. 37 No. 7, pp. 819-849. https://doi.org/10.1108/MAJ-07-2021-3263
Publisher
:Emerald Publishing Limited
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