Providing Short-Term Relief by Amending IAS 39 -the IASB's Mission?

Abstract

Background and Problem Discussion: As a reaction to the severe financial crisis of 2008, the IASB decided to amend IAS 39 after being subjected to extensive pressure from EU leaders and regulators. The amendment allows new types of reclassifications of financial instruments, with the result that changes in fair value of these instruments are no longer accounted for in the statement of income. An argument for introducing new reclassification options was to provide short-term relief for some entities. The amendment was controversial and there was critique from both outside and inside the organization. The issues regarding the amendment are particularly interesting since banks are in the center of the ongoing fair value debate. The following research questions have been defined: - To what extent did the amendment give short-term relief to listed EU banks during the financial crisis? - Do the findings support the actions taken by the IASB, considering their status as an independent standard setter? Aim: This thesis contributes to the fair value debate, including the trade-off between relevance and reliability of accounting, by providing evidence regarding the effects of reclassifications. The findings may be of significance for future regulations and standard setting processes, as this paper shows the effects of the IASB’s decision to amend IAS 39. Method: A quantitative approach was utilized to review the use of reclassifications during 2008 and 2009. 225 listed European banks were examined to provide descriptive statistics. The empirical findings were used to determine the effect of the amendment based on banks’ accounting figures. Also, correlations and deciles are presented in order to identify connections between different variables. Conclusions and Contribution: Our study reveals that the amendment provided short-term relief to a large extent during 2008, but that the effect was partly reversed during 2009. Also, we show that the effects were mainly related to large system-relevant banks. The findings to some extent support the actions taken by the IASB, but we argue that other measures should have been taken instead. The thesis contributes to the previous knowledge by reviewing the effects from one additional year, as well as examining the entire population of listed EU banks. Suggestions for Further Studies: It would be interesting to see an interview or survey regarding the managers’ motives for reclassifying financial assets, since this study has only examined factors that are observable from outside the companies. Also, the application of reclassification according to the forthcoming IFRS 9 will be relevant to examine. Finally, it would be interesting to investigate how analysts and investors manage a reformed accounting principle, such as going from IAS 39 to IFRS 9.