EFFECT OF FAIR VALUE ACCOUNTING ON FUTURE EARNINGS OF LISTED DEPOSIT MONEY BANKS IN NIGERIA

ABSTRACT This study examined the extent of effect of fair value accounting on future earnings of listed Deposit Money Banks (DMBs) in Nigeria. This is a vital issue considering the debate on the wider use of fair value accounting for banks’ financial instruments even in developing economies and assertions by scholars that fair value of financial instruments is misleading and irrelevant in jurisdictions where markets for financial instruments are largely inactive. Correlation research design was adopted using panel data multiple regression technique on data extracted from the audited financial statements of fourteen DMBs listed on the Nigerian Stock Exchange between 2012 and 2016. The study reveals that fair value accounting has significant predictive effect on future earnings of listed DMBs in Nigeria. It specifically shows that the use of direct observable and non-discretionary inputs in fair value estimation positively affects future earnings of listed DMBs in Nigeria. It also shows that the indirect observable and/or unobservable inputs based levels two and three measurements have negative effect and reduce ability to predict future earnings of listed DMBs in Nigeria significantly. This study recommends regulators should develop mechanisms that will continuously promote the use of observable inputs in the measurements and reporting of financial instruments. It also recommends that where observable inputs are not available, prudential guideline rather than unobservable inputs should be used in fair value measurement. Finally, it recommends that Standard setters should review the permission to use discretionary inputs in the measurement of financial instruments in order to avoid possible abuse of it.