Asian Journal of Economics, Business and Accounting

One of the most serious concerns presently facing the accounting profession is the growing complexity, extension, and significance of issues adjoining fair value measurements. The fair value accounting is liable for enhancing financial destruction. This research study the samples of licensed commercial banks and the financial institution listed under Colombo stock exchange to examine the association between the fair value accounting and the small earnings increase reported by the banks attributable to earnings management. We used the statistical methodology follow by Beatty et al. [1] to test the banks reported fair value assets and liabilities associated with bank report small earnings increase. We use both the current year and one-year ahead data after controlling discretionary provision for loan loss, discretionary security gains and losses and other features of banks. We found evidence that; banks reported fair value assets and liabilities are positively associate with bank reported small earnings increase. We further use the fair value hierarchy; to identify which level of fair value assets and liabilities associated with bank reported small earnings increase and we found the evidence that the level 2 fair value assets and liabilities are a predominant determination for the association between banks reported fair value assets and liabilities associated with bank report small earnings increase. The assets available-sales report under fair value is the primary use of item earnings management and the level 2 fair value assets and liabilities to reporting smooth earnings over the periods. Therefore, consistent with past research and present us, banks use the fair value measurements to manage the earnings.