A Study On The Decision Usefulness Of The Fair Value’s Second And Third Level On The View Of Valuation

That the accounting objective has changed to decision usefulness gave rise to the use of fair value, and the use of fair value then gave birth to the valuation for the purpose of financial reporting. In the fair value hierarchy, Level1inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities, while Level2and Level3inputs are related to some valuation techniques. Thus Level2and Level3can be sorted into the field of valuation for the purpose of financial reporting. This paper studies the decision usefulness of the second and third level of fair value.First, review the related financial accounting standards and valuation guidebook to understand the system background. Then, analyze the decision usefulness of the valuation for the purpose of financial reporting from two angles of relativity and accountability and two layers of fundamental qualitative characteristics and enhancing qualitative characteristics by means of the Conceptual Framework for Financial Reporting which is globally accepted. It is concluded that the valuation for the purpose of financial reporting can well satisfy the fundamental qualitative characteristics, but can’t completely satisfy the enhancing qualitative characteristics.Then, evolve the Ohlson price model to examine the value relevance of second and third level of fair value. The results show that the loss of fair value from Level2and Level3is significantly negatively correlated with the stock price, while the change of fair value from Level1is not significantly correlated with stock price. Next, use the earnings model to do the robustness test. The results accord with that of the price model. The empirical results state that fair value’s Level2and Level3have value relevance, and the relavance is stronger than that of Level1fair value.Last, by analyzing cases and reading literatures, conclude the problems that currently occurred in the valuation of Level2and Level3, including that this kind of valuation is not popular and the disclosure is not in place, the earning-management motivation makes this kind of valuation less neutral, the problem of fair value measurement standards and the technical problems of valuation. All these existing problems impair the relativity and accountability of Level2and Level3fair value, namely the decision usefulness, thus should be solved.