Evaluation of Fair Value Relevance and Sensitivity to Valuation Assumptions

Ma, L; Wells, P

Evaluation of Fair Value Relevance and Sensitivity to Valuation Assumptions

Ma, L

Wells, P

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Publication Type:: Working Paper
Citation:: 2024
Issue Date:: 2024-01-01

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Field	Value	Language
dc.contributor.author	Ma, L https://orcid.org/0000-0003-1115-5051
dc.contributor.author	Wells, P https://orcid.org/0000-0001-6822-4826
dc.date.accessioned	2024-08-23T01:19:25Z
dc.date.available	2024-08-23T01:19:25Z
dc.date.issued	2024-01-01
dc.identifier.citation	2024
dc.identifier.uri	http://hdl.handle.net/10453/180543
dc.description.abstract	This paper evaluates whether the relevance of investment properties measured using Level 3 inputs is impacted by the assumptions underpinning the determination of fair values. Evidence is provided of investors generally finding investment property fair values determined with Level 3 inputs to be relevant, and the values are not discounted in market price. However, this is not the case when there is evidence of firms using optimistic assumptions in the determination of fair values. Specifically, there is a material price discount of recognized investment property values as well as fair value gains for these observations. Our research setting of real estate investment firms has several advantages as these firms typically have as their major assets investment properties whose fair value and rental income can be observed from financial reports. This allows investors to easily infer and compare the key valuation assumptions as captured by the capitalization rate. The implication for more general circumstances where valuation assumptions cannot be inferred from financial reports is that detailed disclosures of assumptions are necessary for users to assess the reliability of fair values determined with Level 3 inputs.
dc.language	en
dc.rights	info:eu-repo/semantics/openAccess
dc.subject	1501 Accounting, Auditing and Accountability, 1502 Banking, Finance and Investment
dc.subject.classification	Accounting
dc.subject.classification	3501 Accounting, auditing and accountability
dc.subject.classification	3502 Banking, finance and investment
dc.title	Evaluation of Fair Value Relevance and Sensitivity to Valuation Assumptions
dc.type	Working Paper
utslib.for	1501 Accounting, Auditing and Accountability
utslib.for	1502 Banking, Finance and Investment
pubs.organisational-group	University of Technology Sydney
pubs.organisational-group	University of Technology Sydney/Faculty of Business
pubs.organisational-group	University of Technology Sydney/Faculty of Business/Accounting Discipline
utslib.copyright.status	open_access	*
dc.rights.license	This work is licensed under a Creative Commons Attribution 4.0 International License (CC BY 4.0). To view a copy of this license, visit https://creativecommons.org/licenses/by/4.0/
dc.date.updated	2024-08-23T01:19:24Z

Abstract:

This paper evaluates whether the relevance of investment properties measured using Level 3 inputs is impacted by the assumptions underpinning the determination of fair values. Evidence is provided of investors generally finding investment property fair values determined with Level 3 inputs to be relevant, and the values are not discounted in market price. However, this is not the case when there is evidence of firms using optimistic assumptions in the determination of fair values. Specifically, there is a material price discount of recognized investment property values as well as fair value gains for these observations. Our research setting of real estate investment firms has several advantages as these firms typically have as their major assets investment properties whose fair value and rental income can be observed from financial reports. This allows investors to easily infer and compare the key valuation assumptions as captured by the capitalization rate. The implication for more general circumstances where valuation assumptions cannot be inferred from financial reports is that detailed disclosures of assumptions are necessary for users to assess the reliability of fair values determined with Level 3 inputs.

Please use this identifier to cite or link to this item:

http://hdl.handle.net/10453/180543