Fair Value Measurement Discretion and Opportunistic Avoidance of Impairment Loss Recognition

Prior studies find evidence that opportunistic reporting occurs in settings where fair value measurement is used. However, such research cannot determine whether the source of the opportunistic reporting is the estimate of fair value itself. Using detailed insurer investment holdings information, we separate the use of fair value measurement discretion from the application of non-measurement-related discretion in accounting for incurred losses of financial instruments. Our evidence contradicts the view that fair value measurement discretion plays a large role in opportunistic avoidance of loss recognition for financial instruments. Instead, managers appear to avoid impairment loss recognition by opportunistically applying subjective criteria related to perceived loss persistence and intent to hold.