Accounting for Financial Instruments under IFRS 9 – First-Time Application Effects on European Banks’ Balance Sheets

Abstract

IFRS 9 was introduced by the IASB in 2014 and became mandatory for fiscal years starting in 2018. It bears fundamental changes in the accounting requirements for financial instruments, especially in the areas of recognition, categorisation and measurement, impairment and loan loss provision. As bank balance sheets consists of financial instruments by more than 95 per cent, the application of the new standard was expected to bear major impacts on the bank´s balance sheets. This working paper covers a review of pre-application impact assessments publishes by regulating authorities, such as EBA, auditors and researchers. Main part of the working paper is a comprehensive overall balance sheet impact with a closer look at the effects on CET1 ratios. Therefore, detailed movements between previous and current classification categories as well as the portfolio composition per category are analysed. A specific look on the classification of equity instruments as well as potential changes in maturity of long term investments in loans and bonds are taken. It can be shown that the equity investments usually are not specifically categorised and that IFRS 9 doesn’t have an effect on long term investments by banks. The study also outlines the transition impact from the incurred loss to the expected loss model with a focus on the allocation of assets to the newly introduced three impairment stages and the development of loan loss reserves. The data of the study is clustered by characteristics to show the influence of size, credit risk approach, business model and country and tests the findings for statistical significance. That allows to outline visible trends affecting the new standard´s impact severity.

Keywords: Bank Accounting, Banks, Financial Instruments Accounting, IFRS 9, Impairment, Loan loss provision, Accounting, Auditing

JEL Classification: G15, G18, G21, G28, K22, K23, M41, M42, M48