DETERMINING THE LEVEL OF USE OF FAIR VALUE IN THE BANKING SECTOR
- Gerçeğe Uygun Değer, Gerçeğe Uygun Değer Hiyerarşisi, İçerik Analizi, Türk Bankacılık Sektörü
- Fair Value Fair Value Hierarchy Content Analysis Turkish Banking Sector
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In recent years, one of the most critical changes in accounting standards is the increasing use of fair value measurement (Mala & Chand, 2012, p. 22). Fair value is defined as the price to be paid as a result of the sale of an asset or the transfer of a liability in an ordinary transaction between market participants at the measurement date (TFRS 13, p. 3). Proponents of the concept of fair value claim that fair values better reflect current market conditions and provide relevant information promptly, thereby increasing transparency and encouraging urgent corrective action (Malone et al.2016, pp. 60-61). On the other hand, opponents of fair value claim that fair value which is estimated based on managerial assumptions and models is not relevant and unreliable. Moreover, they argue that using fair values in this way worsens the global financial crisis (Allen & Carletti, 2008; Gökgöz, 2012, p.320) Standard setting institutions have determined a fair value hierarchy within the scope of international financial reporting standards in order to eliminate these negativities. Fair value hierarchy is used to ensure consistency and comparability in fair value measurements and explanations. Following the adoption of fair value in international financial reporting standards, level 1, level 2 and level 3 inputs in the fair value hierarchy table have been used in measuring the fair value of both financial and non-financial items (Artemyeva, 2016, p.21).
When the literature is examined, it is seen that the current related studies focus on determining the level of use of fair value and the relationship between fair value and firm value and profitability. On the other hand, it is observed that most of the current studies on the financial sector focus on the reliability of the fair values of financial instruments. Kolev (2008), Goh et al. (2009), and Song et al. (2010) analyzed the relationship between fair value hierarchy and firm value and the reliability of fair value use in 2008, while Fiechter and Novotny-Farkas (2011) focused on the level of relationship between financial instruments of banks that adopt accounting standards. As a result of the analysis, Kolev (2008), Goh et al. (2009), and Song et al. (2010) concluded that all three measurement levels of fair value are related to firm value. However, they found that the reliability of level 3 fair values was consistently low, and the value relationship was the lowest. Goh et al. (2009) found evidence that investors perceive level 2 fair values as significantly less relevant than level 1 fair values. The conclusions of Fiechter and Novotny-Farkas (2011) support this view.
Based on the literature review, this study focuses on examining the level of use of fair value. Accordingly, the study aims to examine the changes in the use of fair value in terms of level and years of financial statement items reported by banks operating in the Turkish banking sector between 2012 and 2018. First, the study discussed the concept of fair value and the fair value hierarchy. Then the relevant literature review is presented. Finally, the findings are presented obtained as a result of the examination of the fair value hierarchy tables issued in the financial statement footnotes of the banks operating in the banking sector.
- DESIGN AND METHOD
The data regarding the companies used in the research were obtained from the independent audit reports on the website of the Public Disclosure Platform (KAP).
In the study, the fair value hierarchy tables issued by the companies in the footnotes of their financial statements were analyzed by the content analysis method, and the level of fair value usage was determined. The data set was collected before January 1, 2020, and an ethics committee approval document is not required.
- FINDINGS AND DISCUSSION
Thirteen banks operating in the banking sector between 2012 and 2018 were included in the study. The research includes 91 firm/year data belonging to these 13 banks. First of all, the general descriptive statistics obtained from the fair value hierarchy table were explained in the study, and subsequently, the financial statement items used and the changes in their amounts over the years were examined.
When the fair value hierarchies in the financial reports of these 13 banks are examined, it is determined that the fair value hierarchy tables consist of the financial assets and financial liabilities of the banks. Banks' financial assets and liabilities are commonly found to consist of: financial assets whose fair value difference is reflected on profit/loss, available-for-sale financial assets and liabilities, affiliates and subsidiaries, and hedging derivative financial assets and liabilities. The findings regarding these financial statement items are explained below.
When the yearly and level-based amounts of financial assets are analyzed, it is seen that the total financial assets reported with three levels of fair value in 2012 amounted to TRY 132 billion. However, this amount increased to approximately TRY 472 billion in 2018. When Level 1 inputs are analyzed, the approximate amount of financial assets valued using level 1 inputs in 2012 was TRY 114 billion (86% of total financial assets reported at fair value), while this amount reached approximately TRY 185 billion in 2018 (39% of total financial assets reported at fair value). When level 2 inputs are analyzed, the approximate amount of financial assets valued using level 2 inputs in 2012 was TRY 12 billion (8% of total financial assets reported at fair value), while this amount was approximately 276 billion TL (58% of total financial assets reported at fair value) in 2018. When financial assets reported using Level 3 inputs are analyzed, it is seen that amount of the financial assets reported using the fair value in 2012 was approximately TRY 6 billion (6% of the total financial assets reported at fair value), and this amount has reached approximately TRY 12 billion (3% of the total financial assets reported at fair value) by 2018.
As for level based financial asset items, it has been determined that financial assets ready for sale constitute 87% of financial assets reported using level 1 inputs. On the other hand, it was determined that 58% of the financial assets reported using level 2 inputs consist of loans, 24% of derivative financial assets for hedging purposes, and 12% of financial assets available for sale. Finally, it was determined that 42% of the financial assets reported using level 3 inputs consist of financial assets ready for sale, 41% from subsidiaries and affiliates, and 17% financial assets whose fair value difference is reflected on profit/loss.
When the yearly and level-based amounts of financial liabilities are examined, it is seen that the number of financial liabilities reported with three different levels of fair value in 2012 was approximately TRY 4 billion and this amount increased to TRY 336 billion in 2018. It is seen that the financial liabilities that were valued using level 1 inputs in 2012 were stable over the seven years. Financial liabilities valued by using Level 2 inputs amounted to approximately TRY 4 billion in 2012 (93% of total financial liabilities reported at fair value) and TRY 324 billion in 2018 (93% of total financial liabilities reported at fair value). Finally, it is observed that financial liabilities reported using level 3 inputs followed a stable course between 2012 and 2017 (5% of total financial liabilities reported with fair value). In 2018, this amount increased slightly and reached approximately TRY 12 billion (4% of total financial liabilities reported with fair value).
In the case of level-based financial liability items, the majority of financial liabilities reported using level 1 inputs are financial assets whose fair value difference is reflected in profit/loss. It has been observed that 74% of the financial liabilities reported using Level 2 inputs consist of deposits. On the other hand, it has been determined that approximately 98% of the financial liabilities reported using level 3 inputs consist of credits obtained.
- CONCLUSION, RECOMMENDATION AND LIMITATIONS
This study analyzed the fair values issued in the financial statements of 13 banks operating in the Turkish banking sector using the content analysis method. The data obtained from the fair value hierarchy table in the financial statements have been taken into consideration. Research findings were first evaluated on a level basis, and then the changes over the years were examined.
According to the analysis results, it has been determined that banks mainly report their financial assets and liabilities at fair value. It was determined that financial assets valued using Level 1 inputs stood out in 2012 and 2013. In other years, it was observed that financial assets valued using level 2 inputs were at a higher level. When the changes in levels are analyzed over the years, it was seen that the highest increase was in financial assets valued using level 2 inputs. This finding is similar to the studies by Laghi, Pucci, Tutino, and Marcantonio (2012); Mwapula (2013); and Cebeci & Gökşen (2019).
Analysis results show that banks mostly evaluate their financial liabilities using level 2 input. Although the amount of financial liabilities valued using Level 2 input has increased over the years, it was pretty stable (approximately 93% of financial liabilities were reported using level 2 inputs between 2012-2018). The findings are similar to the studies by Bosch (2012), and Mwapula (2013).
In summary, in light of the data obtained from the fair value hierarchy table, it has been determined that both financial assets and financial liabilities reported at fair value have continuously increased over the years. Based on these data, further studies can be conducted to determine the factors affecting the level of use of fair value by banks and to determine the relationship between the use of fair value and firm value and profitability.
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