Impact of IAS 39 reclassification on income smoothing by European banks

Journal of Financial Reporting and Accounting, Forthcoming

19 Pages Posted: 4 Mar 2019 Last revised: 20 Nov 2019

Date Written: 2019

Abstract

The article examines the impact of the reclassification of IAS 39 on income smoothing using loan loss provisions among European banks. The author predicts 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. The 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: Earnings Management; Income Smoothing; Loan loss provisions, IFRS, IAS 39; Financial Crises, disclosure regulation, banks, European banks, real earnings management,

JEL Classification: C23; G14; M41

Suggested Citation

Ozili, Peterson K, 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 K Ozili (Contact Author)

Independent ( email )

Nigeria
Nigeria
Abuja
Nigeria

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