Risk relevance of fair value income measures under IAS 39 and IAS 40

Purpose - This paper seeks to examine the risk relevance of fair value income measures under IAS 39 and IAS 40. Design/methodology/approach - The study sample comprises Jordanian insurance companies. Data were collected from two main sources: Jordanian insurance companies' annual reports, and the official website of the Amman Stock Exchange. The study begins by investigating the volatility of four income measures, calculated by including and excluding holding gains or losses of financial instruments and property investments. Then it examines the association between its four income volatility measures and one stock market-based risk factor, in order to provide evidence on the risk-related information content of each income volatility measure. Findings - Income based on fair values reflects income volatility more than historical cost-based income. It is also found that income is (not) more volatile with the recognition of unrealized fair value gains/losses on financial instruments (investment property). Results of assessing the relative explanatory power of income volatility measures suggest that not all fair value income volatility measures can be a good proxy of the total risk. On the contrary, none of our income volatility measures provides significant incremental risk-relevant information for total risk. Originality/value - Most prior studies have focused on the value relevance of fair value accounting in Western developed countries, and mainly in the banking sector. This study makes a significant contribution to existing knowledge via exploring the applications of fair value accounting by insurance companies and investigating the implications of mark-to-market on risk, instead of share price, in an emerging country - Jordan. The findings of this study are useful to researchers and capital-market participants interested in explaining accounting and market risk measures.