IMPACT OF SFAS 157 AND SFAS 115 CHANGES

Impact of SFAS 157 and SFAS 115 Changes On Securities Portfolio

Impact of SFAS 157 and SFAS 115 changes on securities portfolio

1. Introduction

This paper is motivated by the ongoing shift of financial reporting standards for listed companies towards investment security portfolio reporting, notably the increasing importance of investment security portfolio as an accounting measurement attribute. Starting out as a specific remedy for the inequities of the reporting model for certain financial instruments, investment security portfolio has manifested itself as the dominant measurement paradigm for financial instruments and, more recently, has increasingly been implemented for measurement of non-financial items. The cost- and transaction-based reporting model is in decline, a new market-value and event-based model on the rise, with dramatic implications for the role and properties of balance sheet measurement and accounting income. (Barth, Beaver, Landsman, 2001)

This shift in measurement paradigms is driven by the presumed decision relevance of market-based measures. Both SFAS's 157 and SFAS 115 stress the capacity of market values to incorporate, in an efficient and virtually unbiased manner, market consensus expectations about future cash flows. Opponents of investment security portfolio measurement, on the other hand, criticize the questionable reliability of investment security portfolio measures, especially for model-based estimates relying on management's expectations and projections. In particular, the implementation of investment security portfolio as a balance sheet measure is the subject of intense discussion and debate. (Barth, Beaver, Landsman, 2001)

Prior empirical research on investment security portfolio measurement is mostly limited to financial instruments. Results so far support the incremental value relevance of investment security portfolio disclosures for securities and derivatives held by banks and insurance companies. Park et al. (1999) find value relevance of recognized investment security portfolios for available-for-sale securities under SFAS 115. While all these studies focus on financial sector firms, Simko (1999) for a cross-industrial sample finds no significant sign of incremental value relevance for SFAS 157 disclosures, which is attributed to the insignificance of financial activities for these firms. (Barth, Beaver, Landsman, 2001)

With respect to other financial instruments, notably loans held by banks, results differ, which can be interpreted as lack of reliability due to private information. (Barth, Beaver, Landsman, 2001) On the other hand, Beaver and Venkatachalam (2000) find value relevance for the discretionary component of loan investment security portfolios. The notion of perceived insufficient reliability is especially critical for non-financial instruments. Evidence so far rests on parallels from market-value regimes in Australia and the UK and thus should be considered with caution. As an example, Barth and Clinch (1998) find value relevance for the remeasurement differences of non-current assets under Australian Generally Accepted Accounting Principles (GAAP), yet further specification shows significant results only for negative amounts, that is, asset write-ups are not value-relevant. Summarizing the extant empirical literature, the relevance of investment security portfolio measurement can only be supported for securities traded on highly liquid markets, while the evidence reinforces the significance of the reliability objection both for financial and non-financial ...