Fair Value (U.S. GAAP) and Entity-Specific Measurements for Asset Retirement Obligations: Effects of Incentives and Benchmarks on Earnings Management

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A total of 86 financial managers participated in an experiment designed to assess the reliability of Level 3 fair value (U.S. GAAP) and entity-specific (IFRS) measurements of performance obligations. The study focuses on asset retirement obligations because, to date, under U.S. GAAP they are the sole performance obligation measured at fair value. The findings indicate that with a benchmark, managers tend to manage earnings less with fair value measurements than entity-specific measurements. In contrast, without a benchmark, managers tend to manage earnings irrespective of whether the obligation is measured using fair value or entity-specific value. Findings suggest that to the extent IFRS entity-specific measurements are associated with internally derived benchmarks, they may be more reliable than Level 3 fair value U.S. GAAP measurements that will not have benchmarks.