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Mandatory IFRS Adoption and Accounting Quality of European Banks

Research output: Contribution to journalJournal article

Published

Journal publication date04/2011
JournalJournal of Business Finance and Accounting
Journal number3-4
Volume38
Number of pages45
Pages289-333
Original languageEnglish

Abstract

This paper examines the implications of mandatory IFRS adoption on the accounting quality of banks in twelve EU countries. Specifically, we analyse how the change in the recognition and measurement of banks’ main operating accrual item, the loan loss provision, affects income smoothing behaviour and timely loss recognition. We find that the restriction to recognise only incurred losses under IAS 39 significantly reduces income smoothing. This effect is less pronounced in countries with stricter bank supervision, widely dispersed bank ownership and for EU banks cross-listed in the US. This provides additional evidence that institutions matter in shaping financial reporting outcomes. Further, the application of the incurred loss approach results in less timely loan loss recognition implying delayed recognition of future expected losses. In the light of the ongoing financial crisis it is questionable whether this is a desirable financial reporting outcome of mandatory IFRS adoption.