Impact of IAS 39 Reclassification on Income Smoothing by European Banks

Journal of Financial Reporting and Accounting, Forthcoming

19 Pages Posted: 4 Mar 2019

See all articles by Peterson K Ozili

Peterson K Ozili

University of Essex - Essex Business School; Central Bank of Nigeria

Date Written: 2019

Abstract

We examine the impact of the reclassification of IAS 39 on income smoothing using loan loss provisions among European banks. We predict that the strict recognition and re-classification requirements of IAS 139 reduced banks' ability to smooth income using bank securities and derivatives, motivating them to rely more on loan loss provisions to smooth income. Our findings do not support the prediction for income smoothing through loan loss provisions. Also, there is no evidence for income smoothing in the pre- and post-IAS 39 reclassification period. The implication of the findings is that: (i) European banks did not use loan loss provisions to smooth income during the period examined, and rather rely on other accounting numbers to smooth income; (ii) the IASB’s strict disclosure regulation improved the reliability and informativeness of loan loss provision estimates among European banks during the period of analysis.

Keywords: Banks; Earnings Management; Income Smoothing; Loan Loss Provisions; IFRS; IAS 39; Financial Crises

JEL Classification: C23; G14; M41

Suggested Citation

Ozili, Peterson Kitakogelu, Impact of IAS 39 Reclassification on Income Smoothing by European Banks (2019). Journal of Financial Reporting and Accounting, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3331771

Peterson Kitakogelu Ozili (Contact Author)

University of Essex - Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Central Bank of Nigeria ( email )

Plot 33, Abubakar Tafawa Balewa Way
Central Business District, Cadastral Zone
Abuja
Nigeria

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