Research On The Fair Value Hierarchy Of Financial Instruments In Chinese State-Owned Listed Banks

China’s financial market and financial instruments are at the stage ofsteady development, with the accelerating expansion and the increasingcomplexity of financial instruments. Financial instruments in domesticmarket, developed from the very fundamental loans and deposits,inter-bank borrowing/lending, bonds, stocks to derivatives, structuredproducts and wealth management products, and will embrace the newdevelopment trend. The fair value measurement of these financialinstruments has always been a hot topic in the fields of finance andaccounting.According to International Accounting Standard, a financialinstrument is any contract that gives rise to a financial asset of one entityand a financial liability or equity instrument of another entity. Fair valueis the amount for which an asset could be exchanged, or a liability settled,between knowledgeable, willing parties in an arm’s length transaction.An entity shall use a fair value hierarchy that reflects the significance of the inputs used in making the measurements to classify fair valuemeasurements. The fair value hierarchy shall have the following threelevels. Level1refers to the unadjusted quoted prices in active markets foridentical assets or liabilities; Level2indicates the fair values which aredetermined by using the inputs other than quoted prices included withinLevel1that are observable either directly or indirectly; and Level3pertains to the fair values which are determined on the basis of theunobservable inputs. In2006, the Chinese Ministry of Finance issued theEnterprise Accounting Standard, which contains almost identical rulesrelated to financial instruments, fair value measurement and fair valuehierarchy.Throughout China’s banking sector, the state-owned listed banks,namely, Bank of China (BOC), Industrial and Commercial Bank of China(ICBC), China Construction Bank (CCB) and Agricultural Bank of China(ABC), collectively referred to as “the Big Four” hold the mostcomprehensive and complex financial instruments. Consequently, theauthor selected the disclosed information in2011annual reports of BOC,ICBC, CCB and ABC for detailed analysis. The author collected,summarized and analyzed fair value information disclosure of financialinstruments both from the accounting perspective and by product,performed a research on the fair value hierarchy for the state-owned listedbanks, identified potential problems in the fair value hierarchy of financial instruments, and then probed the reasons. Furthermore, theauthor assessed the impact of the fair value hierarchy transfer onoperating results, accounting, internal control and risk management inChina’s banking sector. The assessment will serve as a reference for thestated-owned banks, joint-stock commercial banks, city commercialbanks and rural commercial banks.To explore the improvement areas of financial instruments’ fairvalue hierarchy information for Chinese state-owned listed banks, theauthor selected the world’s leading bank-the United Bank of Switzerland(UBS) for a comparative analysis. After compiling and analyzing UBS’sdisclosed information of fair value hierarchy both from the accountingperspective and by product, the author rendered proposed improvementsrelated to financial instruments’ fair value hierarchy for Chinesestate-owned listed banks. Finally, in view of UBS’s current holdingportfolio and the prospect of financial instruments in China, the authorput forward the forecast of the development trend of financial instrumentsin domestic market, and shaped the outlook of the adoption of fair valuehierarchy of financial instruments accordingly.