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Implementation of IAS 39 by Swedish banks

Implementation of IAS 39 by Swedish banks

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Published by isaac2008
The study explores transition difficulties faced by Swedish bank groups on the way
of implementing IAS 39, Financial Instruments: Recognition and Measurement.
Deemed the most controversial and challenging Standard for adoption by the financial
sector, it indeed poses new demands on classification, recognition and measurement
of financial instruments, and sets out new hedge accounting rules, previously
unseen in Swedish practice. Additionally, the structure of banks’ balance sheets
makes IAS 39 also the central one among all other Standards in terms of number of
balance sheet items it impacts.
The study explores transition difficulties faced by Swedish bank groups on the way
of implementing IAS 39, Financial Instruments: Recognition and Measurement.
Deemed the most controversial and challenging Standard for adoption by the financial
sector, it indeed poses new demands on classification, recognition and measurement
of financial instruments, and sets out new hedge accounting rules, previously
unseen in Swedish practice. Additionally, the structure of banks’ balance sheets
makes IAS 39 also the central one among all other Standards in terms of number of
balance sheet items it impacts.

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Published by: isaac2008 on Apr 23, 2008
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J\u00d6NK\u00d6PING INTERNATIONAL BUSINESS SCHOOL
J\u00d6NK\u00d6PING UNIVERSITY
Implementation of IAS 39 by Swedish
Banks
Interest Rate Swaps in Hedging Applications
Master\u2019s thesis within Financial Accounting
Authors:
Gogolis, Sergejs
G\u00f6rgin, Robert
Tutors:
Artsberg, Kristina
Wramsby, Gunnar
J\u00f6nk\u00f6ping
June 2005
Master\u2019s Thesis in Financial Accounting
Title:
Implementation of IAS 39 by Swedish Banks: Interest Rate Swaps
in Hedging Applications
Authors:
Gogolis, Sergejs
G\u00f6rgin, Robert
Tutors:
Artsberg, Kristina
Wramsby, Gunnar
Date:
2005-06-03
Subject terms:
IAS 39, Hedging, Interest Rate Swaps, Banking, Fair Value, Fi-
nancial Instruments
Abstract

In 2005, all groups listed on European stock exchanges are required to prepare their consolidated financial statements according to International Financial Reporting Standards (IFRS). IFRS are different from local regulations across Europe in many aspects, and observers expect the transition process to be thorny and resource- draining for the companies that undertake it.

The study explores transition difficulties faced by Swedish bank groups on the way of implementing IAS 39, Financial Instruments: Recognition and Measurement. Deemed the most controversial and challenging Standard for adoption by the finan- cial sector, it indeed poses new demands on classification, recognition and measure- ment of financial instruments, and sets out new hedge accounting rules, previously unseen in Swedish practice. Additionally, the structure of banks\u2019 balance sheets makes IAS 39 also the central one among all other Standards in terms of number of balance sheet items it impacts.

The study uses qualitative method to explore whether transition to IAS 39 is likely to improve transparency in reporting derivatives. Focus is on use of interest rate swaps as hedge instruments in mitigation of interest rate risk.

It is concluded that differences between two reporting frameworks have been well understood by the banks early in the implementation process. A new negative feature of the Standard is increased volatility in earnings as a result of a more wide-spread re- liance on fair value measurement method. This accounting volatility impedes compa- rability of performance results, as well as conceals true efficiency of economic hedge relationships. To some degree, the volatility can be minimized by application of hedge accounting. However, a bank must methodically follow a set of rigorous rules if hedge accounting is to be adopted. Fair value option is a more straightforward al- ternative to hedge accounting, but it brings in additional concerns, and has not yet been endorsed in the EU.

It is additionally argued that recognition of all derivatives on BS and measurement at fair value are two important features of IAS 39 that indeed increase reporting trans- parency by minimizing risk of undisclosed hidden losses.

1
Table of contents
1
Introduction..................................................................................................... 4
1.1
Background..............................................................................................................4
1.2
Problem formulation..............................................................................................5
1.3
Purpose.....................................................................................................................5
2 Method.............................................................................................................6
2.1
Research approach..................................................................................................6
2.2
Procedure for interviews........................................................................................7
2.3
Validity......................................................................................................................8
2.4
Sample selection......................................................................................................9
3 Theoretical Framework...................................................................................11
3.1
Main literature sources for pre-study.................................................................11
3.2
The concept of fair value.....................................................................................11
3.3
\u201cWhat\u2019s so fair about fair value?\u201d.......................................................................12
3.4
On swaps................................................................................................................15
4 Regulatory Basis.............................................................................................18
4.1

IAS 39: summary and explanations....................................................................18 4.1.1 Evolution of IAS 39................................................................................19 4.1.2 Relevant aspects of IAS 39.....................................................................19 4.1.3 Hedge accounting in practice.................................................................23

4.2

Swedish GAAP on accounting for FI................................................................25 4.2.1 Classification and accounting treatment...............................................26 4.2.2 On hedging...............................................................................................27

4.3
Two frameworks contrasted................................................................................28
5 Empirical Results...........................................................................................30
5.1
Generic issues (Q 1-3, Common section).........................................................30
5.2
Specific issues (Q 4-9, Common section)..........................................................32

6 Analysis..........................................................................................................35 7 Conclusions....................................................................................................39 8 Final Comments..............................................................................................41

8.1
Suggestions for further research.........................................................................41
8.2
Acknowledgements...............................................................................................41
9 References......................................................................................................42
10 Appendices..................................................................................................... 46

10.1 Abbreviations and explanations..........................................................................46 10.2 List of respondents: pre-study.............................................................................46 10.3 Questionnaire for the pre-study..........................................................................47 10.4 Pre-study results....................................................................................................48 10.5 List of respondents: main study..........................................................................51 10.6 Questionnaire for the main study.......................................................................51

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