The Impact of Accounting Regulatory Change on Banks: A Study on the Reclassification of Financial Assets

Abstract

As of October 2008, the new amendments to IAS 39 & IFRS 7 were introduced by IASB as a direct reaction to the financial crisis. Since IFRS followers was given the option to reclassify certain financial assets, it partially changes the mark-to-market requirements, and leads to the fair accounting regime being less tied up with relevant accounting treatments. Using a sample set of manually-collected data, this paper empirically examines how the sampled European banks from different regions use this reclassification to strategically deal with problematic financial assets and how these reclassification activities are associated with different bank characteristics. Furthermore the paper provides evidence indicating how this regulatory change affects the accounting results and disclosures.The general findings show that the new amendment helps the banks with the declining condition and avoid further impairment losses. In our study, the banks that adopted the reclassification option took advantage of the positive effects on profits. The positive effects on shareholder equity were not as significant. Furthermore, the empirical results show that the banks that did not apply the option were characterized by a higher ROE compared to the banks that had applied the reclassification. Among the other financial ratios, leverage ratio is relevant but not significantly related. For the non-financial characteristics, the geographic factor “region” plays the most significant role whereas the “operation type” did not affect the decision of bank entities to apply the reclassification option. Lastly, the disclosure evaluation shows that sampled banks from different regions practiced the disclosure requirement differently.