Reclassification of Financial Assets under IAS 39: Impact on European Banks' Financial Statements

Abstract

In response to the financial crisis, the IASB issued on 13 October 2008 an amendment to IAS 39 which enables entities to reclassify non-derivative financial assets held for trading and financial assets available-for-sale. This paper examines the influence of this controversial amendment on the 2008 financial statements of 219 European banks which apply IFRS. I find that approximately one-third of the sample banks have taken extensive advantage of these reclassification opportunities. The mean reclassification amount is 3.9% of total assets and 131% of the book value of equity, respectively. I further document that reclassifying banks avoid substantial fair value losses, and hence, report significantly higher levels of return on assets (ROA), return on equity (ROE), book value of equity and regulatory capital. In particular, the mean ROE switches sign from a negative ROE of −1.4% to a positive ROE of 1.3% due to gains from reclassifications. Overall, this paper documents a substantial impact of the amendments on banks' financial statements and suggests analysing these reclassifications with particular caution.