Diana Lúcia De Almeida
Doctorate – IFRS 9 and the new accounting treatment of the own credit risk of financial liabilities designated as at fair value through profit or loss: incentives for early adoption and effects on value relevance
Advisor: Prof. Dr. Fernando Dal-Ri Murcia
Comission: Profs. Drs. Luiz Nelson Guedes de Carvalho, Fernando Caio Galdi and Marco Aurélio dos Santos
Class: 215, FEA-5
Fair value accounting has become a crucial measurement principle in international accounting, and its increase in financial reporting has generated debate both in practice and in the academic literature. Particularly when measuring long-term debt, discussions surrounding the use of fair value remain controversial and have not yet reached a consensus in the accounting literature and among practitioners. In 2010, the International Accounting Standards Board (IASB) reissued the International Financial Reporting Standard (IFRS) 9 – Financial Instruments, which replaces IAS 39, introducing a new accounting treatment of fair value changes attributable to changes in firms’ own credit risk (OCR) of financial liabilities designated as at fair value through profit or loss (FVOL). Under IAS 39, OCR used to be treated in the income statement, whereas IFRS 9 requires the treatment in other comprehensive income instead. In November 2013, the IASB amended IFRS 9 to permit entities to early adopt the new accounting treatment of OCR without the need to adopt IFRS 9 entirely. This change in the accounting treatment and the amendment in IFRS 9 instigated a depth analysis about its possible impacts. In that sense, this study examines two related topics: the incentives to early adopt the new accounting treatment of OCR without adopting IFRS 9 entirely, and the effects on the value relevance of net income figure. The sample is non-probabilistic and contains international financial institutions that apply IFRS, and have FVOL. Based on logistic models, the results on accounting choice indicate that the Return on Equity (ROE) and institutional and macroeconomic factors influence the likelihood to early adopt the new accounting treatment of OCR. Although volatile earnings were a concern that put pressure on the IASB to change the accounting treatment of OCR, there is no evidence that earnings volatility influenced the likelihood to early adopt the new accounting treatment. Similarly, there is no evidence that the available-for-sale volatility influenced the likelihood to early adopt the new accounting treatment of OCR. Based on multiple linear regressions, the results on value relevance reveal that after eliminating fair value changes attributable to changes of OCR out of the income statement, the value relevance is not significantly increased. This finding is inconsistent with the primary objective of the IASB for IFRS 9, which is to increase the value relevance of earnings. This research adds the extant literature because, as far as I know, this is the first investigation on the accounting choice to early adopt the accounting treatment of OCR, and on the value relevance of net income figures after the mandatory adoption of IFRS 9, in 2018. Thus, this study contributes to this controversial, but an interesting issue for research and practice, the own credit risk of FVOL, whose literature is still incipient and have not yet reached a consensus. Addressing the fair value option and the own credit issue is a chance to contribute to the fulfilment of a gap in the accounting literature and to try to approximate academics and practitioners.
*Abstract provided by the author