Download this Paper Open PDF in Browser

The IFRS Option to Reclassify Financial Assets out of Fair Value in 2008: The Roles Played by Regulatory Capital and Too-Important-To-Fail Status

49 Pages Posted: 9 May 2017  

Peter Fiechter

University of Neuchatel - Institute of Financial Analysis

Wayne R. Landsman

University of North Carolina Kenan-Flagler Business School

Ken V. Peasnell

Lancaster University - Department of Accounting and Finance

Annelies Renders

Maastricht University

Date Written: May 6, 2017

Abstract

Amendment of IAS 39 by the IASB in 2008 provided an option to reclassify investments from fair value to historical cost. Whereas this option was available to all firms, it was particularly relevant to banks. We predict that “too important to fail” (TITF) banks took less advantage of this option than non-TITF banks because the political protection they enjoyed insulated them from regulatory pressure. Banks that did not enjoy this protection had greater reason to make use of the option to reclassify since doing so would protect their Tier 1 capital. As predicted, findings reveal that TITF banks made less use of the reclassification option to protect their Tier 1 capital and that there is a significant moderating influence of TITF status on the incentive to reclassify investments for banks with lower regulatory capital. This finding is consistent with TITF banks placing less weight on protecting regulatory capital than non-TITF banks, and thereby retaining flexibility to sell assets. Taken together, our findings provide evidence that accounting choices made by managers are affected by the importance of their firms to the economies in which they are domiciled.

Keywords: Too Important to Fail, Fair Value Accounting, Bank Regulation, Financial Crisis

JEL Classification: G14, G21, G28, M41, M48

Suggested Citation

Fiechter, Peter and Landsman, Wayne R. and Peasnell, Ken V. and Renders, Annelies, The IFRS Option to Reclassify Financial Assets out of Fair Value in 2008: The Roles Played by Regulatory Capital and Too-Important-To-Fail Status (May 6, 2017). Review of Accounting Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2964315

Peter Fiechter

University of Neuchatel - Institute of Financial Analysis ( email )

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

Wayne R. Landsman (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-3221 (Phone)
919-962-4727 (Fax)

Kenneth V. Peasnell

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom
+44 1524 593631 (Phone)
+44 1524 847321 (Fax)

Annelies Renders

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200MD
Netherlands

Paper statistics

Downloads
92
Rank
238,889
Abstract Views
332