Reclassification of Financial Assets Under IAS 39: Impact on European Banks’ Financial Statements

Accounting in Europe, Forthcoming

28 Pages Posted: 22 Dec 2009 Last revised: 26 Aug 2010

Peter Fiechter

University of Neuchatel - Institute of Financial Analysis

Date Written: December 22, 2009

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 financial statements 2008 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 significant higher levels of return on assets (ROA), return on equity (ROE), book value of equity, and regulatory capital. In particular, the mean ROE switches signs 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.

Keywords: Reclassification, Financial Assets, Fair Value Accounting, Banks, IAS 39, Financial Crisis

JEL Classification: G21, M41

Suggested Citation

Fiechter, Peter, Reclassification of Financial Assets Under IAS 39: Impact on European Banks’ Financial Statements (December 22, 2009). Accounting in Europe, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1527107

Peter Fiechter (Contact Author)

University of Neuchatel - Institute of Financial Analysis ( email )

Rue A.-L. Breguet 2
Neuchatel, CH-2000
Switzerland

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