Value-relevance of reported changes in fair values and measurement-related fair value disclosures: evidence from the Australian real estate industry

Abstract

Purpose: The paper aims to investigate the value-relevance of changes in fair values of investment property reported under International Accounting Standards (IAS) 40 and International Financial Reporting Standards (IFRS) 13. Design/methodology/approach: Multivariate regression models are used to regress cumulative market-adjusted stock returns of real estate firms on changes in fair values, along with control variables and corporate governance variables, in order to examine the research question. Findings: Using hand-collected data from the Australian Real Estate Industry (AREI), the authors find that changes in fair values of investment property are value-relevant for equity investors. The authors further find that using unobservable inputs in an active market (Level 3 inputs) does not diminish the information content of fair values. The authors document that properties valued exclusively by directors have a significantly reduced value-relevance, whereas property valuations made collectively by both directors and independent valuers have superior value-relevance, possibly owing to the combination of inside knowledge and externally imposed monitoring. Collectively, the findings suggest that in the real estate industry, where unobservable inputs are commonly used to determine fair values of properties, the fair values determined subjectively are perceived to be sufficiently informative and relevant. Research limitations/implications: The authors' findings have important implications for accounting standard-setters in considering whether an external valuation should be required and whether the extensive measurement-related fair value disclosure requirements are useful. Originality/value: The study extends previous archival evidence and complements prior commentaries on experimental and analytical work in the Australian regulatory environment.