IFRS 7 Disclosures and Risk Perception of Financial Instruments

Abstract

There is a wide variety of reporting choices when presenting and disclosing financial instruments under IFRS 7. Behavioural theory suggests that the label under which a financial instrument is presented affects the risk perception of investors. We analyze in an experimental setting how and why the European reporting practice of presenting financial instruments by measurement categories affects the risk perception of non-professional investors. We find that risk perception is associated with management’s choice of a measurement category. First, there is a direct labeling effect of the measurement categories. Second, there is an indirect effect because investors seem to form certain predictions about which type of financial product is reported under a specific measurement category. These results imply that there should be a more wide-ranging debate about possible presentation formats for financial instruments, as the current format does not necessarily ensure a neutral presentation.

Keywords: Availability, Derivatives, Experiment, Fair Value, Financial Instruments, IAS 39, Representativeness, Risk Judgment

JEL Classification: C91, G11, K22, M41