Earnings Management By Using Fair Value Measurement

One of the most serious concerns presently facing the accounting profession is the growing complexity,extension,and significance of issues adjoining fair value measurements.The fair value accounting is liable for enhancing financial destruction.The many researchers and practitioners criticized the fair value accounting and blame for it causing financial failure.The use of fair value accounting on financial reporting must investigate base on the requirement of such stakeholders.This dissertation study the samples of licensed commercial banks and the financial institution listed under the Colombo stock exchange to examine the association between fair value accounting and earnings management.The first part of the research study we are examining the provisions for loan loss and discretionary security gains and losses by introducing the fair value assets and liabilities.The second part of the research we examining the association between the fair value accounting and the small earnings increase reported by the banks attributable to earnings management.We used the statistical methodology follow by Beatty et al.(2002)to test the banks reported fair value assets and liabilities associated with earnings management both provisions for loan loss and bank report small earnings increase.We test several robustness and sensitivity analysis for our research design.We use both the current year and one-year ahead data test the provision for loan loss,discretionary security gains and losses and bank report small earnings increase after controlling bank-specific features.We found evidence that;banks reported fair value assets and liabilities are positively associate with provision for loan loss,as well as banks reported fair value assets and liabilities are positively associate with bank reported small earnings increase.We supplementary use the fair value hierarchy;to identify which level of fair value assets & liabilities associated with earnings management both provisions for loan loss and bank report small earnings increase.We found the evidence that the level 2 fair value assets and liabilities are a predominant determination for the association between provisions for loan loss,as well as with bank reported small earnings increase.Furthermore,we decompose the fair value assets and liabilities into different types and found that assets available-sales are the predominant determination for the association between fair value measurements and earnings management.We examine if there is any significant difference between licensed commercial banks and the financial institution and we did not find any significant difference among them regarding the association between fair value measurements and earnings management.Both licensed commercial banks and the financial institution used fair value assets and liabilities to manage the earnings.We used downward earnings management and upward earnings management by differentiating movement of earnings management,and we found the evidence that level 2 fair value assets and liabilities positively associated with downward earnings management and as well as upward earnings management by the use of discretionary security gains and losses.Finally,we examine the association between earnings volatility and fair value measurements.We expect that banks use fair value assets and liabilities,especially level 2 fair values assets and liabilities,report smoother earnings.Therefore,we expect a negative coefficient.The test results provide evidence for our expectation,and banks use the level 2 fair value assets and liabilities to reporting smooth earnings over the periods.In summary,we find that,consistent with our expectation,1)banks reported fair value assets and liabilities are positively associate with provision for loan loss 2)banks reported fair value assets and liabilities are positively associated with bank reported small earnings increase.3)The level 2 fair value assets and liabilities are a predominant determination for the association between banks reported fair value assets and liabilities associated with provision for loan loss as well as with bank report small earnings increase.4)The assets available-sales report under fair value is the primary use of item earnings management.5)The level 2 fair value assets and liabilities positively associated with downward earnings management and as well as upward earnings management by using discretionary security gains and losses.6)Moreover,the level 2 fair value assets and liabilities to reporting smooth earnings over the periods.With all these evidence consistent with past research and present us,banks use the fair value measurements to manage the earnings.