Reclassification of Financial Instruments in Publicly Listed IFRS Banks: A Cross-Country Study of Determinants, Level of Compliance, and Value Relevance

Abstract

At the height of the global financial crisis in October 2008, and as a result of the extreme political pressure put on the IASB by European leaders and finance ministers, the IASB issued amendments to IAS 39 and IFRS 7. These amendments permit firms to suspend fair value accounting by reclassifying non-derivative financial instruments (held-for-trading assets and available-for-sale assets) in certain circumstances. These amendments have potential effects on the financial position and earnings as a result of reclassification adjustments of financial instruments. Consistent with the ongoing debate and the significant regulatory reforms already implemented by IASB in the development of accounting standards for financial instruments over the previous 20 years, and motivated by the lack of research in this area, this study has three objectives. First, it empirically investigates the extent and the determinants of applying the reclassification choice for non-derivative financial instruments by publicly listed IFRS banks. Second, it explores the level and determinants of compliance with mandatory IFRS 7 disclosure requirements by reclassifying banks. Third, it examines the value relevance of the reclassification choice. The sample of this research consists of a comprehensive global sample of 462 publicly listed IFRS banks from 69 countries around the world, over the period 2007–2010.