Available-for-sale Research Articles

Challenges and economic consequences of IFRS 9: evidence from China

PurposeThis study investigates the implementation challenges and economic consequences of the International Financial Reporting Standards 9 (IFRS 9) Financial Instruments.Design/methodology/approachDescriptive evidence on equity asset reclassifications and estimated impairment using the new expected credit loss (ECL) model are presented. Multivariate analyses on the disposal of available-for-sale (AFS) and fund investment post-announcement and the value relevance of impairments to financial assets post-implementation are performed.FindingsOver 60% of sample firms report inconsistent equity asset reclassifications and do not change estimated impairment using the new expected credit loss model. Firms also switch from AFS to equity fund investments post-announcement. Lastly, impairments to financial assets increase in value relevance to investors’ post-implementation, but only in financial institutions and firms with Big 4 auditors.Originality/valueThis study's findings suggest that IFRS 9 presents implementation challenges and changes equity investment strategies. They also indicate cross-sectional differences in firms' ability to effectively apply the new standards. This study is valuable for policymakers, business leaders, investors and academics.

Reporting comprehensive income and firms' earnings management

This study investigates the impact of reporting comprehensive income and other income through performance or equity statements on firms' earnings management through the selective sale of available-for-sale (AFS) securities. The objective is to explore how Canadian firms can improve transparency by altering managers' accounting behavior by switching from equity statements to income statements. The study used a difference-in-differences method in a quasi-experimental framework. The results showed that negative net income and post-period net income in performance statements can reduce realized gains and losses. Available-for-sale securities also affect these gains and losses in performance and equity statements. Single statement adopters only smooth earnings when net income is positive or when available-for-sale gains are large enough to offset negative earnings. Income statement (IS) adopters reduced earnings smoothing more than other treatment firms. Managers with less job security were found to be more likely to engage in earnings smoothing, and earnings smoothing decreased more during the pre-to-post period. Equity incentives reduced the tendency to smooth earnings, particularly in treatment firms with CEOs whose pay is more sensitive to stock price changes. Treatment firms outperform control firms in predicting future earnings using realized gains and losses on AFS securities per share. The findings suggest that firms manage earnings less effectively by selectively selling AFS securities when comprehensive income (CI) or other comprehensive income (OCI) is presented in performance statements. Firms win when earnings management is reduced because it reduces the informativeness of realized gains and losses on AFS securities. Managers will use more earnings management strategies as long as they have incentives.

Fair value information and regulatory capital management using financial asset reclassification by Korean insurers

This study examines whether and when insurers adjust their classification of financial assets to manage regulatory capital. Using a sample of Korean insurers during 2013 to 2019, we document the following. First, insurers exhibit a tendency to adjust the classification of debt securities between held-to-maturity (HTM) and available-for-sale (AFS) financial assets when the companies have lower regulatory capital ratios. Second, the reclassification of debt securities from HTM to AFS is more pronounced when the excess of fair value over the carrying amount of the securities becomes larger. Third, the tendency to reclassify debt securities from AFS to HTM becomes greater when the accumulated valuation gains on AFS are larger. Overall, our study provides evidence that insurers use accounting discretion to manage regulatory capital and that fair value information can predict such behavior.

Using Available‐for‐sale Securities to Smooth Earnings: Evidence from China

Utilizing a large sample of non‐financial public firms in China from 2009 to 2016, we find robust evidence that non‐financial firms smooth their earnings through realized gains and losses on available‐for‐sale (AFS) securities. This effect is more pronounced for firms with weaker internal and external corporate governance. Firms with an incentive to manipulate up their earnings are also less likely to smooth earnings through AFS securities. Moreover, firms with more accrual earnings management or real earnings management tend to smooth earnings to a greater extent through AFS securities. Firms smooth earnings only when their net income is positive or when net income is negative and the gains from AFS securities are large enough to offset negative earnings. We do not find supporting evidence for engaging in big bath earnings management through the realization of losses on AFS securities. These findings suggest that gains and losses on AFS securities allow non‐financial firms to actively smooth their earnings. Last, the accounting standards amendments in 2017 that essentially disable earnings smoothing through AFS securities increase price efficiency.

Reimbursement Costs of Auditing Financial Assets Measured by Fair Value Model in Jordanian Financial Firms’ Annual Reports

This paper investigates the impact of financial assets measured by the fair value (F.V.) model, proxied by held-for-trading (H.F.T.), available-for-sale (A.F.S.), and the fair value option (F.V.O.), on reimbursement costs charged by external auditors in the context of the Jordanian finance industry. The study applied fixed-effects regression with a sample of 2408 firm-year observations of Jordanian firms from 2005 to 2018. The regression results confirmed that higher H.F.T. and A.F.S. of fair-valued assets were the primary cause of high audit fees; however, the F.V.O. had no significant impact. The impact of the F.V. model on audit reimbursement expenses has received little scholarly attention even in developing countries. The current study introduces an updated audit-fee model and new empirical evidence to provide more insights into this relationship and bridge a gap in the auditing literature. As a result, it investigates the impact of each fair-valued financial asset category on audit pricing for the first time. This research is unique in that it uses the F.V. model to investigate the association between each item of fair-valued financial assets and audit fees. The findings of this research provide current empirical information on the implication of the F.V. model in Jordan. The results contribute by guiding audit fee determinants in the context of Jordan, where there is no specific limit for audit fees determined by the government. The outcomes guide regulatory authorities in monitoring and regulating the audit profession and regulating the audit of F.V. model practices.

Classification of Equity Instruments under IFRS 9: Determinants and Consequences

AbstractOne of the main differences between International Financial Reporting Standard (IFRS) 9 Financial Instruments and International Accounting Standard (IAS) 39 Financial Instruments: Recognition and Measurement is the classification and measurement of equity instruments that are financial assets. Under IFRS 9, a firm must measure acquired equity instruments at fair value through profit or loss (FVPL) unless the firm irrevocably chooses at initial recognition to measure those assets at fair value through other comprehensive income (FVOCI). In this case, a firm must recognise all changes in FVOCI without the possibility of reclassifying these amounts into profit or loss. In this context, this study has two main objectives. First, it examines the frequency of firms that elect to classify equity instruments as FVOCI in the first year of IFRS 9 adoption and identifies the determinants of the decision to classify equity instruments as available for sale (AFS) (under IAS 39) or as financial assets at FVOCI (under IFRS 9). Second, it considers whether this choice has any influence on the value relevance of financial information. The results of a sample based on firms in the FTSE 100 and EURO STOXX 50 show that risk is the main determinant of the reclassification from AFS to FVOCI in the first year of IFRS 9 adoption, while the level of variable compensation for CEOs (for AFS) and the level of fair value hierarchy (for AFS and FVOCI) are the main determinants for the classification of equity instruments. Regarding the consequences of this change, the findings indicate that the prohibition of recycling for the FVOCI option under IFRS 9 leads investors to pay more attention to the changes in fair value as recognised in OCI.

Bank earnings management and performance reporting of comprehensive income

FASB’s ASU 2011-05 mandated that comprehensive income (CI) and other comprehensive income (OCI) be reported in performance statements (a single income statement or a separate statement of CI) rather than equity statements. Employing a difference-in-differences research design with ASU 2011-05 as the treatment, I find that presenting accounting information in different statements affects bank earnings management, specifically, presenting CI and OCI in performance statements (especially in single-statements with net income) reduces earnings management through selective sales of available-for-sale (AFS) securities in the banking industry. I also find that the influence of ASU 2011-05 is primarily on banks with high equity incentives in the CEO’s compensation package or less CEO job security. Additional analyses suggest that performance reporting of CI and OCI increases the predictive ability of realized gains and losses of AFS securities; however, banks may manage loan loss provision as a substitute strategy when they have to decrease selective sales of AFS securities.

Auditor pricing of abnormal income from sales of available for sale securities: evidence from the banking industry

We examine the relationship between abnormal income from sales of available for sale (AFS) securities and bank external auditor fees. Prior research finds that income from sales of AFS securities is used to achieve financial and regulatory reporting objectives, helpful in predicting future bank income, and assigned a persistent valuation multiple by investors. Building on prior research that suggests real activities management leads to negative outcomes, we predict and find that auditors respond to abnormal income from AFS securities sales with increases in audit fees and the effect is stronger among high risk (i.e. higher stock return and earnings volatility) banks relative to low risk banks. In additional analyses concerning a bank’s limited flexibility to achieve regulatory capital objectives through managing loan loss provisions, we find evidence of higher audit fees for banks with low regulatory capital and aggressive income-increasing AFS security sales. Among other robustness tests, we find higher audit fees as abnormal income from sales of AFS securities increases among banks with liquidity concerns and those approaching failure. Our findings suggest that auditors interpret abnormal income from AFS securities sales as an indicator of increased client business risk.

The capital market consequences associated with classifying unrealized gains and losses on available-for-sale (AFS) equity securities in GAAP net income

The capital market consequences associated with classifying unrealized gains and losses on available-for-sale (AFS) equity securities in GAAP net income

Implementation costs of IFRS 9 for non‐financial firms: evidence from China

AbstractExamining Chinese non‐financial firms between 2016 and 2019, this study documents that the new accounting standard for financial instruments imposes severe implementation costs on affected firms, as evidenced by a significant rise in the selling of available‐for‐sale (AFS) equity investments and increased audit fee premiums. We also find that the disposal of AFS is more prominent in state‐owned enterprises (SOE) and firms issuing corporate bonds. The increase in audit fees is more severe for non‐SOEs, bigger audit firms and firms with a higher total account balance affected by the new standard.

Regulatory Treatment of Changes in Fair Value and the Composition of Banks' Investment Portfolios

ABSTRACTFollowing the financial crisis of 2007–2008, Basel III recommended that bank regulators include changes in the fair value of available-for-sale (AFS) debt securities in Tier 1 capital. However, the U.S. allowed smaller banks to continue excluding these changes through a one-time opt out election. This paper examines the investment decisions of smaller banks in the 1990s when changes in the fair value of AFS debt securities were temporarily included in regulatory capital. Using a sample of smaller banks and a difference-in-differences research design, we find that low-capitalized banks reduced their investments in more volatile asset classes (e.g., corporate bonds, non-agency MBS) and increased their investments in less volatile asset classes (e.g., treasuries and municipal bonds) after these changes were included. These findings suggest that providing smaller banks with an opt out election potentially allows low-capitalized, riskier banks to continue to hold more volatile securities in their AFS portfolios.JEL Classifications: M41; M48; G18; G21.

Real regulatory capital management and bank payouts: Evidence from available‐for‐sale securities

AbstractThis study examines whether payout policies create incentives for banks to engage in cherry‐picking activities using available‐for‐sale (AfS) securities, otherwise known as gains trading. Such activities are more likely to arise in situations in which capital ratios would otherwise constrain banks’ ability to distribute resources to shareholders. Using a large sample comprising 766 unique US banks, we find a significant and positive association between total payout and realized gains on AfS securities for banks with low regulatory capital. This is consistent with the conjecture that capital‐constrained banks engage in gains trading to free up resources for dividend payments or share repurchases. When partitioning our sample, we find that capital‐constrained banks realize gains and losses on AfS securities only when it is costly to decrease the payout and when the monitoring level is weaker. Further analyses reveal that banks engaging in gains trading to distribute cash to shareholders exhibit significantly higher levels of future default risk and more negative extreme bank‐specific daily returns, patterns that are consistent with risk‐shifting. Finally, with the advent of Basel III, the practice seems to continue among banks that chose to retain prudential filters.

Opacity and risk-taking: Evidence from Norway

This paper investigates how balance sheet opacity affects banks’ risk-taking behavior. We measure bank balance sheet opacity according to two metrics: the ratio of available-for-sale (AFS) securities and the ratio of off-balance sheet items. We show that balance sheet opacity is positively correlated with realized bank risk. Specifically, banks with more AFS securities have lower realized risk, while banks with more off-balance sheet items have higher realized risk. The correlation between opacity and risk depends on both macroeconomic variables and bank characteristics. The positive relationship between bank opacity and bank risk is weaker for better capitalized banks and banks that are subject to more market discipline. The relationship is also weaker during periods of favorable market conditions. Motivated by this analysis, we then investigate how regulation affects bank opacity. We show that higher capital requirements reduce bank opacity and bank risk through a portfolio rebalancing channel.

The Usefulness of Other Comprehensive Income for Predicting Future Earnings

This study investigates whether other comprehensive income (OCI) reported in the statement of comprehensive income (one of the main financial statements after the adoption of K-IFRS) predicts a firm’s future performance. Using the quarterly data of Korean listed companies, we examine the association between OCI estimates and future earnings. First of all, we find that OCI is positively associated with earnings in both 1- and 2-quarter ahead, supporting the predictive value of OCI. When we break down OCI into its individual components, our results suggest that the net unrealized gains/losses on available-for-sale (AFS) investment securities are positively associated with future earnings, while the other components (e.g., net unrealized gains/losses on valuation of cash flow hedge derivatives) present insignificant results. In addition, we investigate whether the reliability in OCI estimates enhances the predictive value of OCI to predict future performance. We find that the predictive ability of OCI, in particular the net unrealized gains/losses on available-for-sale (AFS) investment securities, becomes more pronounced when firms are audited by the Big 4 audit firms. Overall, our study suggests that information content embedded in OCI can provide decision-useful information that is helpful for the prediction of future firm performance.

Hydrogeological Assessment of the Mineral Composition of the Bottled Waters Available for Sale in Poland

Hydrogeological Assessment of the Mineral Composition of the Bottled Waters Available for Sale in Poland

Does Fair Value Accounting Contribute to Systemic Risk in the Banking Industry?

ABSTRACTI investigate whether fair value accounting can contribute to the banking industry's systemic risk. I focus on the adoption of Statement of Financial Accounting Standard No. 115 (SFAS No. 115), which required available‐for‐sale (AFS) securities to be recognized at fair value with unrealized gains and losses included in equity through accumulated other comprehensive income. SFAS No. 115 increased banks' regulatory risk because, at the time, calculation of regulatory capital closely conformed with GAAP equity. I find that systemic risk increased following the adoption of SFAS No. 115. Furthermore, following a subsequent regulatory amendment—which excluded unrealized gains and losses on AFS securities from regulatory capital but did not change their GAAP treatment—systemic risk decreased. Taken together, the evidence suggests that fair value accounting has the potential to increase systemic risk through the explicit inclusion of volatile fair value estimates in regulatory bank capital adequacy assessments. I do not, however, find evidence of fair value accounting impacting systemic risk in its information role; that is, by providing information to a bank's external stakeholders about its financial position and performance. I also show that higher fair value volatility of investment securities, lower bank capital, and larger AFS security holdings increase banks' marginal contribution to systemic risk. My findings should interest regulators and policymakers, as recent regulatory changes in light of Basel III recommendations require unrealized gains and losses on AFS securities to be included in regulatory capital for advanced approaches banks.

Accounting Policy Choice During the Financial Crisis: Evidence From Adoption of the Fair Value Option

We examine banks’ accounting policy choices during the financial crisis where they are strongly motivated to manage earnings or regulatory capital. We address the issue via the initial elections of the fair value option (FVO) under SFAS No. 159, which provides considerable latitude and in particular its transition guidance is amenable to exploitation. We investigate banks’ reasons to elect the FVO and provide evidence regarding whether and how these reasons differed for banks adopting the standard in the first quarter of 2007 (early adopters) versus first quarter of 2008 (regular adopters). We predict and find that early adopters with histories of managing accounting numbers were more likely to make opportunistic FVO elections, and we show that early adopters with low capital tended to exploit the FVO in the opposite direction as those with high capital. With intense regulatory scrutiny since April 2007, we predict and find that regular adopters’ FVO elections complied with SFAS No. 159’s intent. We further analyze the particular reasons why early and regular adopters most commonly elected the FVO for specific types of financial instruments. We find that early adopters’ elections for available-for-sale (AFS) securities and debt reflected opportunism, and regular adopters’ elections for loans held for sale reflected compliance with the standard’s intent to remedy accounting mismatches for economic hedges.

PENYAJIAN PENDAPATAN KOMPREHENSIF LAIN: INVESTIGASI PADA INDUSTRI INFRASTRUKTUR DAN UTILITAS

The purpose of this study was to investigate how the implementation of the presentation of other comprehensive income (OCI) after IFRS implementation in the industrial sector of infrastructure and utility that is listed in the Indonesia Stock Exchange in 2012-2015. The samples were processed as many as 48 companies. OCI component is observed on foreign exchange IAS 10, IAS 24, employee benefits, IAS 55 available for sale and cash flow hedges, IAS 16/19 revaluation of tangible and intangible, and SFAS 15 associations and venture. These research data analysis methods were using cross tabulation and analysis done by testing different test Cramer's V because the data being tested were nominal and non-parametric. Results of the study were that the foreign exchange component of OCI, employment benefits and securities available for sale were the components most often served. As for the foreign exchange component was found a difference in the presentation. Research on the future OCI can be done by digging a further impact on the condition value of OCI micro and macro enterprises.Keywords: Other Comprehensive Income, Foreign Exchange, Employee Benefits, Securities Available for Sale and Hedging, Revaluation of Tangible and Intangible, and Association

Regulatory Treatment of Changes in Fair Value and the Composition of Banks' Investment Portfolios

In their implementation of Basel III, U.S. bank regulators are again including changes in the fair value of available-for-sale (AFS) debt securities in Tier 1 capital, but only for the largest U.S. banks. This paper investigates a potential impact of expanding this regulation by examining bank investment decisions in the 1990's when changes in the fair value of AFS debt securities were included in regulatory capital for all banks. Using a matched sample difference-in differences research design, we find evidence that low-capitalized banks reduced their investments in more volatile asset classes (e.g., corporate bonds, non-agency MBS) and increased their investments in less volatile asset classes (e.g., treasuries and municipal bonds) after changes in fair value were included in regulatory capital. We also find that low-capitalized banks change their holdings of these asset classes in the opposite direction after regulators subsequently excluded changes in fair value from regulatory capital. These findings inform regulators worldwide regarding a possible consequence of Basel III. We also contribute to prior research by suggesting that changes in maturity and credit risk around the passage of SFAS 115 (Beatty 1995; Hodder, Kohlbeck, and McAnally 2002) were partially obtained by changing the composition of asset classes within banks' investment portfolios.

Market Reaction to Banks' Accounting Valuation and Risk Reporting Choices

We examine banks’ discretion on accounting valuation and risk-weight reporting for investment securities and how these two aspects of securities reporting are associated with market-based risk measures. Using a sample of US publicly listed banks from 2001 to 2014, we find evidence indicating that the risk weight of available-for-sale (AFS) securities moderates the positive association between AFS accounting valuation and banks’ bid–ask spreads. However, such moderation is not valid for held-to-maturity (HTM) securities. Our model specifies the endogeneity in accounting classification and the decision in assigning risk weights for investment securities. Our results remain robust after controlling for macroeconomic conditions, bank-specific characteristics, and alternative measures of information asymmetry. In addition, we find that the negative moderation of regulatory risk weight is more pronounced in banks that are either weakly capitalized or engaged in earnings management.