Impact of IFRS (9) on the size of loan loss provisions: An applied study on Jordanian commercial banks during 2015-2019

Sa’Ad A Al-Sakini,Adel Mohammed Qatawneh,Ismail Al Awamleh,Hanan Al Awawdeh

doi:10.5267/j.ac.2021.5.010

Abstract

A fraudulent financial statement is an issue that continues to be discussed as a form of deviation from corporate governance. Covid-19 pandemic has also demanded management to uphold the company's performance to have a good public image. Thus, the present study sets out to scrutinize the fraud pentagon theory on fraudulent financial statements. Each element is not able to be tested directly. However, there are proxies. The pressure element is proxied as a personal financial need. The opportunity is becoming the nature of industry. Each of the qualities of the external auditors as well as the change of directors propose rationalization and competence. The frequent number of CEO’s appearances in photos is a proxy of arrogance. The testing was carried out on the registered pharmaceutical companies of the Indonesian stock exchange in the span of the 2015-2019 period. The samples were selected by the means of sampling technique which is purposive. Data are scrutinized by the means of panel data regression. The analysis results show that the characteristics of the industry positively affects financial reports which are fraudulent. Changing top management positions such as directors can be an indication of financial reports which are fraudulent. The personal financial need variables, the caliber of external auditors and the quantity of CEO’s appearance in photos pose no effects on the fraudulent financial statements of the Indonesian's pharmaceutical companies.

Highlights

The International Accounting Standards Board (IASB) issued in July 2014the final version of International Financial Reporting Standard (IFRS) (9) for financial instruments and financial provisions to replace IASB (39) for financial instruments in terms of proof and measurement
The primary objective of the application of IFRS 9 is to move to a forward-looking model to recognize the decline in credit quality, as this model does not require a particular event to record credit losses as much as it requires timely information on any indicators indicating the possibility of credit losses
As for the average percentage of basic capital of ordinary equity (CET1) of Jordanian commercial banks during the study period, the results indicate that it was 15.8%, which is relatively high and far exceeds the regulatory limits required by the Central Bank of Jordan and the Basel Committee, which confirms the high adequacy of the bank's capital

Summary

Introduction

The International Accounting Standards Board (IASB) issued in July 2014the final version of IFRS (9) for financial instruments and financial provisions to replace IASB (39) for financial instruments in terms of proof and measurement. The standard requires measuring and proving expected credit losses (ECL) by accurately estimating the expected amounts, taking into account the time value of the money, as well as providing documented and supported information on past events and current and anticipated current and future circumstances. This will have a significant impact on banks because this standard will increase the burden of provisions balances related to expected credit losses and could lead to a reduction in the regulatory capital of banks (Mohammad & Hamed, 2017)

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Conclusion