The effects of the 2008 financial crisis on accounting standards within the global

banking industry and the implications it has had on the response to Covid-19

Hafsa Hakeem

MSc DISSERTATION

2021
 Preface
The motivation for this study came from the recent pandemic Covid-19. Since economic
downturns are an interesting area of research, there was relatively less market research relating
Covid-19 hence to keep the economic downturns in consideration the study chose to turn the
attention on the 2008 financial crisis. By conducting thorough research in the context of accounting
topics and the 2008 financial crisis, the study found the topic relating to fair value a hot topic in
the accounting industry, though the study must focus on one specific aspect therefore under this,
the study chose to conduct research relating to the reclassification of financial assets under IAS
39. The reason for including IFRS 9 in the context of Covid-19 is so that future studies can base
their framework upon that though it has still conducted this in relevance with the previous IAS 39
regarding reclassification of financial instruments to remain consistent since there are no studies
relating to this topic yet.

The research was generally motivated by the works of Fiechter (2011), Paananen et al (2011), Lim
et al (2013), Adzis (2016), Hedi et al (2012) and Duh (2012) while the study has been based off
the work of Fiechter (2011).

I would like to present my gratitude to my supervisor Dr Mohamed Khaled Eldaly who has helped
me with the completion of this dissertation by presenting his valuable guidance and has helped me
with any questions I have had along the way.

2
Statement of Authenticity

STATEMENT OF AUTHENTICITY
I have read the University Regulations relating to plagiarism and certify that this dissertation is all
my own work and does not contain any unacknowledged work from any other sources.

Word Count: 13200

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 The effects of the 2008 financial crisis on accounting standards within the global
banking industry and the implications it has had on the response to Covid-19

by

Hafsa Hakeem

2021

Dissertation submission to the Bradford University School of Management in partial fulfilment

of the requirements for the degree of MSc in Finance, Accounting and Management

4
The effects of the 2008 financial crisis on accounting standards within the global banking
industry and the implications it has had on the response to Covid-19

Keywords: reclassification, IAS 39, IASB, financial crisis, banking industry, IFRS 9, accounting
standards, fair value, regulatory capital

Abstract

This study investigates the effects of the 2008 financial crisis on accounting standards within the
global banking industry and whether the IASB has addressed the criticisms when making
amendments to IAS 39 regarding the reclassification of financial instruments and subsequently on
the successor IFRS 9 as this allows us to see what the IASB has done in preparing for the next
financial crisis or currently Covid-19. A sample of 35 European banks have been used to test the
reclassification option against company performance relative to the profitability ratios ROE and
ROA. Financial reporting has long been a topic of debate amongst several researchers and the
debate heavily criticises the IASB’s legitimacy in this case as will be seen through the lens of the
legitimacy theory. Several researchers have claimed that the IASB’s decision regarding fair value
has caused a pro-cyclical contagion in the banking industry hence, continued to call on the reforms
to the classification of financial instruments under IAS 39 so that they are measured out of fair
value to amortised cost. For this study, secondary research has been carried out using bank’s annual
reports on a sample of 35 European banks. The main findings of the study suggests that the
reclassification of financial instruments has had a positive impact on banks, ROA, ROE, Tier 1
capital ratio and other comprehensive income since fair value losses are not recognised in the
income statement, however non-reclassifying banks have also had a positive impact on Tier 1
capital though this can be explained by the fact that many banks were given financial incentives
by the government.

5
List of Abbreviations
IABS – international accounting standards board
FASB – financial accounting standards board
GAAP – general accepted accounting principles
IFRS – international financial reporting standard
IAS – international accounting standard
ROE – rate of equity
ROA – return on asset
OCI – other comprehensive income
AFS – available for sale
HFT – held for trading
LAR – loans and receivables
HTM – held to maturity
ROA07 – return on asset value in 2007/year number as 2 digits
ROE07 – rate of equity in 2007/year number as 2 digits

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Table of Contents
Preface ................................................................................................................................. 2
Abstract ................................................................................................................................ 5
List of Abbreviations ............................................................................................................. 6
1. Introduction .................................................................................................................10
1.1. IASB - The conceptual framework .......................................................................................10
1.1.2. Adoption of IFRS ..............................................................................................................10
1.1.3. Rational/Scope of Study .....................................................................................................11
Aims and Objectives .............................................................................................................11
1.4.1. Research question ..............................................................................................................12
2. Literature review ..............................................................................................................13
2.2. The effects of the 2008 Financial Crisis on the global banking industry ...............................13
2.2.1. The collapse of the banking system ....................................................................................13
2.2.2. Panic selling of financial assets ..........................................................................................13
3. IASB’s response to the financial crisis – the legitimacy crisis ............................................14
3.1. IASB’s governance structure ................................................................................................14
3.1.1. Political pressure and a hall of criticisms ...........................................................................14
4. IAS 39 – Amendment to the reclassification of financial instruments ................................15
4.1.1. Regulatory Capital ............................................................................................................18
4.2.1. Contrasting views of accounting standard setters and bank regulators .............................18
5. Fair value v Historical costing ..........................................................................................19
5.1.1. The concept of theory – Fair value.....................................................................................20
5.1.2. The use of fair value for reclassification of financial instruments ......................................22
6. IAS 39 amended as IFRS 9 ...............................................................................................22
6.1.1. Normative theory...............................................................................................................23
6.1.2. Classification of financial instruments under IFRS 9 - relevance during Covid-19 ............ 23
7. Chapter Summary ............................................................................................................24
8. Methodology ....................................................................................................................25
8.1. Introduction .........................................................................................................................25
8.2. Research Design ...................................................................................................................25
8.2.1. Saunder’s research onion ..................................................................................................25
8.2.2. Research philosophy ..........................................................................................................25
8.2.3. Research approach ............................................................................................................26
8.2.4. Research strategy ..............................................................................................................26
8.2.5. Research Choice ................................................................................................................27
8.3. Sampling and Data Collection ..............................................................................................28
8.3.1. Data Collection ..................................................................................................................28

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 8.3.2. Sampling size and procedure .............................................................................................28
8.3.3. Sampling Decision .............................................................................................................29
8.3.4. Data analysis .....................................................................................................................29
9. Limitations .......................................................................................................................30
10. Ethical Considerations ...................................................................................................30
11. Results and Findings ......................................................................................................31
11.1. Descriptive Statistics Analysis ............................................................................................31
11.2. Case study approach ..........................................................................................................32
11.3. Bank analysis......................................................................................................................33
11.4. Empirical studies on the reclassification of financial assets under IAS 39 (results and
findings) ......................................................................................................................................36
12. Conclusion .....................................................................................................................38
13. Recommendations ..........................................................................................................40
Appendix A ..........................................................................................................................42
........................................................................................................................................................................... 57

Bibliography ........................................................................................................................62

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List of Figures and Tables

Figure 1: source: Fair value as a Theory through International Financial Reporting Standard
Model ............................................................................................................................................ 21

Table 1: Descriptive Statistics ...................................................................................................... 31

9
 1. Introduction
1.1. IASB - The conceptual framework
The conceptual framework assists the International Accounting Standards Board (IASB) and
Financial Accounting Standards Board (FASB) in making changes to the International Financial
Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP).
Relevance, representational faithfulness, and balance are the essential qualitative characteristics of
valuable information that can be used to make decisions according to the IASB’s Conceptual
framework for financial reporting though, there is usually a trade-off between either one of these
characteristics as they are seen as separate (Tarca, 2020). The basic principle the FSAB and IASB
are based on is decision-usefulness (Ehalaiye, Tippett & Zijl 2017). As an entity, the IASB is a
private and supranational group of experts with practical experience in setting accounting
standards, in preparing, auditing, examining, or using financial reports (Tarca, 2020). The idea of
creating international accounting standards is to develop harmonization of the accounting system
worldwide. Harmonization of accounting procedures has the benefits of increasing audit
efficiency; transparency of financial statements and companies can seek new investment
opportunities in other countries where they will follow the same accounting procedures thus
reducing costs (Strouhal, Horak & Boksova, 2017).

1.1.2. Adoption of IFRS

The adoption of IFRS has gained acceptance in over 120 countries worldwide as of 2018 however
it is believed to be ‘pseudo-adoption’ (Luca & Parther-Kinsey (2018). There is extensive literature
which supports the idea that there is increased transparency and comparability of financial
statements after the adoption of IFRS (Singleton-Green, 2015; De George et al, 2016). However,
other studies also suggest that the evidence provided is weak thus the conclusions are mixed on
whether the accounting standards under IFRS are relevant for financial reporting (Bruggemann et
al, 2013). The study conducted by Tarca (2020) assessing whether the adoption of IFRS increases
comparability against local accounting standards. The study hypothesised if policy choices cluster
around the same recognition, measurement and presentation then comparability would less likely
be affected (Tarca, 2020).

This is especially relevant to understand during economic downturns as it can become difficult to
stabilize the global economy once again if there are conflicting financial reports and this was part
of a large debate during the 2008 financial crisis. Since the IFRS has largely embraced fair value
accounting many are concerned about the suitability of this financial reporting standard and are
possibly deterred from adopting IFRS. For example, in the study conducted by Strouhal et al
(2017) on the V-4 countries accounting found that implementing IFRS would be a problem since
lower levels of transparency and liquidity in markets means level 2 or 3 in the fair value
10
measurement hierarchy must be applied for selected assets. In fact, many even point that the global
convergence of accounting standards has become further complex due to IFRS’s inherited
problems (Mala & Chand, 2012). The literature also confirms that politics remain an important
part in policy settings and those decisions made under political stances are so that they are to their
advantage, this is also consistent with the public interest theory (Kothari, Ramanna & Skinner,
2010). It would be fair to say that during economic downturns it is usually the case where
politicians use standard setting processes as a political lobbying process to influence outcomes to
safeguard their interests (Luca & Prather-Kinsey, 2018). Therefore, this suggests whether the
IASB are indeed an independent body of authority or legitimate for that matter if their decisions
cannot be independent.

1.1.3. Rational/Scope of Study

Financial reporting has long been a topic of debate amongst several academics with the debate
intensifying each time markets become illiquid and market prices become volatile therefore, in our
interpretation the study assesses the role of the IASB as an accounting standard setter and their
role in providing the accounting system structure and reform. The report has specifically chosen
the 2008 financial crisis as this not only highlighted the deficiencies within the banking system
but, financial reporting was also the target of much criticism. Furthermore, in the interest of this
study we specifically choose the amendment to the reclassification of financial instruments under
IAS 39 because this helps us understand the role of the IASB as an accounting standard setter and
how their decisions affect economical situations. Although many studies have focused on the
debate concerning IAS 39 and the relevance of fair value many studies fail to focus on the IASB
in a theoretical framework hence we extend upon previous literature and bridge the gap between
the two. In amending accounting standards, the IASB had to prove their legitimacy with an intense
debate surrounding the political influence over the IASB. This study may be of interest to
policymakers, accounting standard setters, users of financial statements, investors or anyone
wanting to increase further knowledge within this area.

Aims and Objectives

1. To understand the role of the IASB as an accounting standard setter
2. To understand whether the decision to reclassify financial instruments under IAS 39 was
appropriate
3. To know whether the IAS 39 amendment of IFRS 9 on reclassification keeps economic
downturns into consideration

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1.4.1. Research question
Research Q1 – To what extent was the role of the accounting standard bodies during the 2008
financial crisis appropriate and timely?
Research Q2 – To what extent do fair value methods hold a higher relevance value than historical
costing during economic downturns?
Research Q3 – How did the accounting standards board’s use the 2008 financial crisis in hindsight
in their response to Covid-19 issues for the global banking industry?

12
2. Literature review
2.2. The effects of the 2008 Financial Crisis on the global banking industry
2.2.1. The collapse of the banking system
Since financial institutions are at the centre of almost all economic downturns it is appropriate to
focus the attention on just the global banking industry. The 2008 global financial crisis saw the
collapse of the global banking system after the bankruptcy of the Lehman Brothers. Further
financial institutions also collapsed soon after throughout the US, Europe and United Kingdom
including the demise of Northern Rock, Bear Stearns, Bradford & Bingley’s, Royal Bank of
Scotland, Bank of America overtaking Merrill Lynch including others (Wiggins, Piontek &
Metrick, 2014). The global financial crisis highlighted the clear deficiencies within the banking
system especially for the US where banks would provide subprime mortgages to those with poor
credit ratings or against inflated asset values resulting in excessive leveraging and risk-taking
thereby causing the housing bubble to collapse (Makin, 2019). Extensive losses were recorded by
banks on mortgage loans leading to the global credit crunch as banks refused to lend to one another
(Bernanke, 2018). As the market froze, clearing prices for key assets fell to their all-time low
resulting in a valuation dilemma (Makin, 2019).

2.2.2. Panic selling of financial assets

The financial crisis left the banking system in a panic. Correcting asset prices led to investors
selling financial assets while the valuation of financial instruments through fair value were
depleting financial assets below their historical cost value hence banks were recording excessive-
write downs which was further complicating the situation. This led to banks selling their assets at
fire-sale prices. There is extensive literature which supports the view that fair value accounting
creates a pro-cyclical contagion whereby the action of one bank selling assets at fire prices leads
to another bank doing the same which reduces fair value assets further resulting in the banking
system collapsing hence, banking regulators called for the suspension of fair value (Cifuentes,
Ferruci & Shin, 2005; Plantin, Shin & Sapra 2008; Abad & Suarez, 2017; Kruger et al, 2018).
Many critics claimed the accounting system exacerbated the effects of the 2008 financial crisis
especially after the IASB revised the fair value measurement under IAS 39 which was approached
with much criticism. The main reasons were blamed for the underlying problems with international
accounting standard setters. Furthermore, stabilizing the banking system is even more complex
especially because accounting standard setters and bank regulators do not perceive financial
statement information in the same view, however a common ground must be found. Further
development regarding this will be added later in the report.

13
3. IASB’s response to the financial crisis – the legitimacy crisis
3.1. IASB’s governance structure
The reason why the IASB is criticised by many for their response to the global financial crisis is
the international accounting standard setters are not considered legitimate. The IASB base their
legitimacy claims on a combination of expertise and transparent procedures though empirical
results suggest participation in adopting the accounting standards set by the IASB are
geographically uneven (Botzem, Quack & Zori, 2017). In fact, post the collapse of the Lehman
Brother the debate concerning the IASB’s governance structure intensified further. It is important
to first understand the governance structure of the IASB because the legitimacy deficiencies in
standard setting causes intense public and political pressure which can lead to changes in banking
regulations as well as the structure of the IASB itself. There are some studies which suggest how
the IASB responded to this legitimacy crisis though there is quite a gap in research in this area of
accounting in a theoretical framework as many studies do not focus on the underlying problems of
the IASB. This study will also touch upon this area to comprehend the underlying issues before
moving forward.

3.1.1. Political pressure and a hall of criticisms

The IASB was already on its way to revise the accounting standards when political pressure led to
them taking short-term action in order to revise the fair value measurement, this suggests a
legitimacy issue on a political level. Studies have provided extensive literature regarding the
political intervention in setting accounting standards in their theoretical frameworks of public
interest theory, capture theory and ideology theory (Gipper et al, 2013; Baudot, 2014; Ramanna,
2015). Under the public interest theory regulations made politically are thought to benefit society
as a whole, while the capture theory suggests regulation is more about the power struggle between
two interest groups who have power to influence outcomes and lastly, the ideology theory suggests
standard setters have a particular ideology and belief regarding the regulations (Miyauch &
Sanada, 2019).

To allow banks to re-capitalise the IASB issued the amendment of the reclassification of financial
instruments under IAS 39 which was one of the many amendments to accounting standards,
without going through the usual standard proceeding. This amendment is also the one which is
most relevant to our study in understanding how accounting standards setters made it easier for
banks to comply with their regulatory capital just by making amendments to their financial
investments (Fietcher et al, 2017). However, this led to the further scrutiny of the accounting
standard setters by international policy makers who heavily criticised their governance structure
and unclear accountability.

14
In fact, political pressure in this case prevailed since the EU politicians have much more leverage
over the IASB to influence their decisions. A recent study by Luca and Prather-Kinsey (2018) used
the legitimacy theory to suggest that for an international body to gain legitimacy it must gain a
sufficient level of acceptance though it may not achieve relevance because of the political aspect
since many countries are unwilling to give up their national sovereignty for an international
jurisdiction which is an output legitimacy issue. The study by Kusano and Sanada (2019) also uses
the legitimacy theory to examine the IASB’s response to the global financial crisis. Kusano and
Sanada (2019) first described the IASB’s response to the criticisms of their response to the
financial crisis as one of pragmatic and cultural legitimacy which they used to restructure their
legitimacy. The IASB took to reform their organizational structure to strengthen their legitimacy.
In this sense the IASB would only gain organizational legitimacy if their activities are desired or
comply with the values or beliefs of the society.

Furthermore, the IFRS were relatively new accounting standards at this point which explained
their uneven geographical participation. To add to this, IFRS had not been tested in a market failure
environment as the last recession to the scale of the Great Depression was almost 80 years ago.
Not only that but recommendations by academics encouraged the IASB to address the different
socio-economic and political situations of different economies especially developing countries in
setting accounting standards since this was also raising questions regarding their effectiveness and
legitimacy which explains why when standard-setters expand to those countries they are met with
the challenges of power asymmetries consistent with the agency theory (Botzem, Quack & Zori,
2017). Therefore, to improve the IASB’s public accountability, the IFRS commenced
organizational transformations through several reforms with the first being the establishment of a
monitoring board in 2009 then changing the IASB chairman in 2011 including their Agenda
Consultation in 2011-2012, the strategy review in 2012 and the establishment of the Accounting
Standards Advisory Forum in 2013 thereby, suggesting that the effects of the 2008 financial crisis
were a turning point for improved accountability and transparency of accounting standards
(Miyauch & Sanada, 2019). New governance mechanisms effectively act as a ‘fertile’ ground
(Deephouse et al, 2017).

4. IAS 39 – Amendment to the reclassification of financial instruments

The 2008 global financial crisis was indeed a turning point to what we know of the IASB and
accounting standards today. The report has initially outlined that greater transparency must be
promoted across accounting standards so that investors are able to make better and more informed
decisions. It would be appropriate to now dig deeper in this topic and understand the changes made
by the IASB which were heavily criticised especially with regards to the fair value measurement.
15
We will first take a historical view of this as we have done with the IASB governance structure.
The most important accounting standards during the financial crisis were IAS 32, IFRS 7 and IAS
39. IAS 32 outlines the presentation of financial instruments while IAS 39 provides the
classification of the measurement of financial assets and liabilities however, this was later
amended to IFRS 9 post-crisis in a simpler form (Hamdi, 2017). IFRS 7 requires entities to
recognise the fair value of assets and liabilities in the disclosures (). To make the report concise
and focused the study only focuses on IAS 39.

Since the report is focusing on the global banking industry it makes sense to focus our attention to
IAS 39. IAS 39 came into effect in 2005 and the basic purpose of this was to provide transparency
and consistency of financial instruments reporting however, since this a much complex area it
ended becoming too complicated with too many inconsistencies. Since the provision came into
effect it has undergone constant changes throughout the years for enhanced transparency of
financial reporting hence why IAS 39 was already controversial for this reason, though this did
not come to shore until the global financial crisis further intensified its effects. IAS 39 classifies
financial assets into four categories. Firstly, financial assets are to be recognised at fair value
through profit or loss. These financial assets are either held for trading or classified at fair value
upon initial recognition through profit or loss and all derivatives fall into this category (Paanen,
Renders & Shima, 2012). The second category is held to maturity financial instruments which are
non-derivative financial assets. The third category is loans and receivables which are non-
derivative financial assets not listed on the active market but which the entity intends to sell
immediately, or they will be held for trading (Knezevic, Palvovic & Stevanovic, 2015). Loans and
receivables and held to maturity are measured at amortized costs where gains and losses are only
recorded when realised. The fourth category is available-for-sale financial assets or financial assets
which are not classified in the other three categories. These are measured at fair value, however,
gains and losses are recognised in other comprehensive income (Fietcher, 2011). The initial
classification of assets is important for subsequent measures as well as for recognition of gains or
losses. Recognition is the amount in which the financial assets are recognised in the financial
statement, and this is what had been the centre of attention on whether banks should reclassify
assets at fair value or historical cost (Bischof et al, 2012).

IFRS was intended for the measurement of an entity’s value as of today not on prediction or
yesterday’s value. The IASB chairman some years prior to the financial crisis initiated that if
political pressure prevails and has the ability to overrule standards which have been made for
transparency this actually equates to ‘beggar thy neighbour’ as it would not provide the consistency
of accounting standards (Tweedie, 2004:4). Despite this, as a response to the financial crisis and
intense political pressure the IASB eliminated the assets available or held for sale category so that
16
all assets are either measured at fair value or historical cost. Banks were also given the option to
retrospectively reclassify financial instruments based on 1st July 2008 when the amendment came
into force (Hewa, Mala & Chen, 2018). Under US GAAP, financial institutions could reclassify
their financial instruments from the trading book to banking book under rare circumstances so
banks could avoid recognising unrealized losses (Bengtsson, 2011). The IASB was also
recommended to allow this reclassification so that there were fewer inconsistencies in application
under IFRS and US GAAP (Bengtsson, 2011). Doing this helped banks reduce the regulatory
pressure upon them though some argue that those banks particularly the too-important-to-fail
banks who did not use this provision was due to the political protection they enjoyed (Ioannou,
Wojcik & Dymski 2019). Furthermore, reclassifying banks were also supported by the government
to boost their market capitalisation to avoid the collapse of the bank. However, in amending the
provision and allowing fair value accounting to amortized cost the IASB also violated the
transparency of accounting standards.

The reclassification of non-derivative financial assets held for trading was moved to cost categories
‘loans and receivables’, ‘held to maturity’ or ‘available for sale’ under rare circumstances which
also affects net income as unrealized loss is not recognised in the income statement (Fietcher et al,
2017). Further to this, available for sale was also moved to either ‘loans and receivables’ or ‘held
to maturity’ under rare circumstances. Prior to the global financial crisis rare circumstance were
defined as almost never however, the third quarter of 2008 was classified as a rare circumstance
(Pogledi, 2015). This reclassification affects net income and equity as fair value loss and gains are
recognised in profit or loss and subsequently in equity. However, for the entity to be eligible for
the reclassification they must meet the definition of loans and receivables (Paanen, Renders &
Shima, 2012). Furthermore, the entity must have the intention and ability to hold the asset till
maturity. The fair value of the reclassifying instruments at the reclassification date become the
new amortized cost which is calculated using the effective interest from the date of change.
Additionally, any unrealized gain or loss from the reclassification recognised in shareholder’s
equity is measured at amortized cost hereafter (Deutsche, 2008). After the issuance of the Basel
III post-crisis the removal of the OCI filter was proposed which meant any changes in the fair
value of available-for-sale securities would affect capital however, this meant banks were more
likely to engage in procyclical selling hence why there was industry opposition (Cantrell & Yust,
2019)

Of the many amendments made to IAS 39, the amendment to fair value through profit or loss ‘held
for trading’ was probably the most controversial. Many academics claimed the amendment to IAS
39 would cause a pro-cyclical contagion and exacerbate the effects of the financial crisis if banks
need to recognise loss later (Laux & Leuz, 2009).
17
4.1.1. Regulatory Capital
A key motivation for banks to reclassify financial instruments was the regulatory capital.
Regulatory capital is important for banks as they are required to maintain a specific Tier 1 capital
ratio under the Basel II Accords specific to their country which are intended to see the bank’s
economic loss (Fietcher et al, 2017). According to the IASB, market prices are better suited to
predict a firm’s cash flows (Filip, 2021). The purpose of the regulatory capital fulfils two points.
Firstly, banks are limited in terms of their current and future risk-taking while non-residual claim
holders of a bank are protected from losses on their current assets (Riepe, 2019). Many academic
studies have claimed that banks will actively make use of the amendment to reclassify financial
assets under IAS 39 to avoid excessive write-down and increase regulatory capital. Reclassifying
financial investments can help banks increase regulatory capital and reduce their exposure to future
losses (Georgescu & Laux, 2013). During periods of economic downturns banks are more likely
to have several realized losses which will reduce their regulatory capital (Cantrell & Yust, 2019).
Fair value requires banks to mark-to-market gains during booms while mark-to-market losses in
an economic downturn which affects capital and reduces lending too as is evidently clear from the
financial crisis (Jarolim & Oppinger, 2012). Many critics have claimed this causes a pro-cyclical
behaviour. In case of capital requirements, however, lending depends on the ratio of capital to
assets not just on capital. Some studies mention fair value can increase asset sales in comparison
to historic cost for forced and discretionary sales (Allen & Carletti, 2008; Laux & Leuz, 2009).
Cantrell & Yust (2019) recommend banks could possibly sell the risky assets and reinvest the
proceeds into less-risky assets to increase their capital ratio, however selling assets at a loss implies
the bank is not able to hold the asset till maturity if they wish to reclassify financial instruments
under IAS 39 hence regulators may require them to recognise their unrealised losses. If banks are
reclassifying these financial instruments, then they must be disclosed in the disclosure
requirements under IFRS 7 explaining the rare circumstance which gave rise to this reclassification
(Hamdi, 2017).

4.2.1. Contrasting views of accounting standard setters and bank regulators

As previously mentioned, accounting standard setters and bank regulators do not view financial
statement information in the same view therefore there will be obvious differences in the objectives
they both want to achieve. Financial information provided by banks in their financial statements
is used by regulators to determine regulatory capital requirements, and the capital markets that
trade on the information discipline bank behaviour.

Academics claim regulatory capital does not need to be equal to financial reporting capital as
‘prudential filters’ for supervisory requirements are applied by bank regulators such as with profit
or loss associated with fair value under IAS 39 (Barth & Landsman, 2010). However, prudential
18
filters which were used to eliminate the temporary fluctuations of fair value did not work as they
just hid non-temporary losses (Riepe, 2019). Furthermore, the IFRS also requires banks to
recognise unrealised gains and losses so that the bank information provides clarity and
transparency to the investors (Bushman & Landsman, 2010). The reclassification of unrealized
gains and losses from available-to-sale instruments affect the Tier 1 capital ratio since banks can
avoid reporting them in their income statement which leads to higher income and retaining. On the
other hand, bank regulators will neutralize this aspect of their financial statement as they believe
it yields a measure of bank capital (Barth & Landsman, 2010). To add to this, unrealised changes
in fair value estimations concerning changes in bank’s credit risk, goodwill and intangible assets
do not necessarily affect bank’s regulatory capital though it affects the equity reported under IFRS
or US GAAP however, this is not the case when it comes to fair value changes on available for
sale debt securities (Arouri et al, 2012). This evidently highlights the conflict between the banking
industry and the accounting standard setters.

5. Fair value v Historical costing

While the study talks about the effects of reclassification of financial assets under IAS 39 on
financial institutions it is the method of reclassification which is criticised. In this section we see
which method has a higher relevance value during a financial crisis and which would be the most
appropriate for the reclassification of financial instruments under IAS 39. The method to determine
the fair value of financial instruments consists of a hierarchy which is amended into three levels.
Those estimated at level 1 are based on market prices, those estimated at level 2 are rooted in the
matrix of market prices, and those estimated at level 3 are based on unobservable inputs (Bagna,
Martino & Rossi, 2015). Though Level 3 is claim to lack contactibility since it does not faithfully
represent underlying values (Filip, 2021). The financial assets measurement under this hierarchy
determines their liquidity while level 3 is most appropriately applied during a financial crisis. As
for historical cost, an entity places their financial instruments at the original monetary value when
it was purchased. Critics claim fair value is not an appropriate measurement to convey decision-
useful information to investors. However, analyst’s decision processes do not consistently process
fair value related information, so the usefulness of decision making and how fair value
measurements are interpreted are likely to vary based on the context (Bischof et al, 2014).

In addition to this, though fair value is a useful tool to measure firm or asset valuation it is
unreliable when there is no active market whereas historical cost is readily available however
valuation is conducted retrospectively and does not reflect the true value of the entity (Cantrell,
Mclnnis & Yust, 2014). Fair value is seen to provide an early warning of market volatility (Liao,
2021). Furthermore, under historical cost banks can sell higher quantity of old loans which
increases lending though the effect depends on which dominates of the two. If capital increase is
19
larger under fair value, then that prevails or if balance-sheet capacity through historical cost is
higher then, historical cost prevails. The study conducted by Jeff (2018) claims that lending under
fair value is not necessarily lower than in a boom as banks sell a higher amount of old loans which
free up more capital. The study also gives reasoning on why fair value may not be pro-cyclical
because of the way asset sales affect a bank’s lending capacity. The study by Cantrell and Yust
(2014) which focusing on historical cost accounting found that historical cost provides information
regarding bank failures over both the short- and long-term time horizons. However, in contrast to
their findings Georgescu and Laux (2013) focuses on three German banks namely the Deutsche
bank, Landeskbanken and Hypo real estate holdings and their failure as they were all regulated
based on historical cost accounting since they took high-leverages either on-balance sheets or off-
balance sheets and had a high debt-equity ratio.

Under IAS 39, an entity must present their financial statements which are a true reflection of the
current value of their firm and the potential risks they are facing on their financial instruments
which is why majority of investors favour the fair value method. Where market conditions are
uncertain interest rates will rise as well as the risk spread which is then discounted to use to carry
out assessment procedures (Liao, 2021). Therefore, the fair value will be lower which leads to the
devaluation of assets. The effects of this can be calculated using three different discount rates
namely, comparable interest rate and a low and high rate. According to Bischof et al, 2014), the
basic method of financial instruments valuation which is especially true for financial institutions
is the amortized or historical cost while the fair value estimations are disclosed in the footnotes.
Aside from the heterogeneity present in empirical studies the hypothesis that fair value accounting
methods exacerbated the financial crisis does not hold enough weighting instead it is said to be
caused by risk-weighted assets (Bhat, Frankel & Martin, 2011; Gorton & Metrick, 2012: Amel-
Zadeh, Barth & Landsman, 2017). In fact, Bischof et al (2014) studies how financial analysts
interpret accounting information in the context of the financial crisis regarding European banks
which comply with IFRS and found that financial analysts will actively seek fair-value related
information from international banks (Lim, 2013). The study further observed this against US
banks though found a negative correlation for financial analysts requesting fair value information.

5.1.1. The concept of theory – Fair value

It seems the accounting standard setters have taken this in an economic view whereby fair value
paradigm utilizes the market price as a relevant metric (Jedd, 2018). This is relevant with the
efficient market hypothesis whereby stocks are traded based on their fair market value. Empirical
studies suggest that the market price is relevant because market prices aggregate in an efficient
and unbiased manner which reflect the expectations of the investors within the market who believe
the cash flow patterns of the assets and liabilities appear in the entity’s financial statements (Fama,
20
1970; Fama, 1991). In a simpler form, according to the efficient market hypothesis, the market
price of the equity of a firm reflects the fair value of assets and liabilities which are present in the
bank’s financial statements (Ehalaiye, Tippett & Van, 2017).

Figure 1: source: Fair value as a Theory through International Financial Reporting Standard Model

Fair value can be considered through three accounting theories namely depreciation theory, asset
theory and profitability theory which can be used to assess fair value against historical cost (Osho,
2020). Depreciation is where the value of an asset decreases over time possibly due to
obsolescence. In the calculation of depreciation expense historical cost must be incorporated apart
from revaluation so that succeeding capital allowance uses the asset’s revalued amount (Jackson,
2010). The effect of accelerated depreciation remains even when the company has the information
about the fair value of the used assets. Used capital assets with accelerated depreciation can be
sold for less than the same used capital assets with straight-line depreciation (Osho, 2020).

Under the asset theory, an asset is any item which is tangible or intangible and are suggestively
recorded based on their historical cost for enhanced consistency as opposed to fair value. However,
estimating the historical cost of assets all incidental cost incurred to improve the asset should be
dated back though maintenance costs of assets should be seen as an ordinary expense (Bessong &
Charles, 2012). Fair value should be a more appropriate measure of an asset and is the framework
for the IFRS since it provides market level interpretations of the asset and a measure of liquidity
or illiquidity in active or inactive markets.

Under the profitability ratio the term profitability and return tend to be of the same meaning.
Investors seek to invest in for a satisfactory return on their investment and managers should
actively seek profit maximisation which looks at both profit and assets utilized (Osho, 2020). Fair
value assumes market are perfect therefore, financial reporting should meet the needs of the
investors if it is based upon current market prices. However, another view suggests markets are
21
relatively imperfect and therefore, financial reporting should be based on past transactions which
are based on entity-specific measurements to meet the needs of current shareholders (Whittington,
2014). Profitability is measured through Rate of Equity, Return on Asset, Return on Investment
and Earnings Per Share.

5.1.2. The use of fair value for reclassification of financial instruments

The study conducted by Chang, Liu and Ryan (2021) suggests that adoption of the fair value option
for financial instruments was popular amongst early adopters. This was especially true for the
available for sale securities as well as with unrealized losses to raise their future net incomes. Both
Song (2008) and Guthrie et al (2011) also found this adaptable behaviour common with early
adopters who wanted to increase their regulatory capital. However, before the crisis banks would
adopt the fair value option to record financial instruments with cumulative unrealized losses at fair
value as this would raise their valuation and sell them to replace with similar instruments which
they would not record at fair value to avoid future net income volatility (Sodan, 2019). However,
this was going against the basic objective of accounting standards to promote transparency and
accountability across financial reporting and was also showing bank’s exploitation of accounting
rules (De Jager, 2014). An entity who decides to reclassify their financial instruments the fair value
of those financial assets becomes their new amortized cost on the date of reclassification. As for
those financial assets which are reclassified out of fair value through profit or loss and reclassified
to loans and receivables are recorded at fair value on the date of reclassification however,
subsequent measures are at amortised cost at the effective interest method which banks should
record at the date of reclassification.

6. IAS 39 amended as IFRS 9

While the IASB may not have necessarily replaced IAS 39 with IFRS 9 due to Covid-19 it is worth
noting that the accounting standard setters identified the clear deficiencies within IAS 39 to prevent
a repeat of the 2008 financial crisis, however the effectiveness of IFRS 9 in a market failure
environment is to be assessed though we leave this for future research as the pandemic is still on-
going at the time of writing therefore, to understand the full magnitude of the crisis is not possible.
To overcome the limitations and challenges which came with IAS 39 both pre-crisis and during
the crisis, the IASB replaced IAS 39 with IFRS 9 in 2009 for further transparency of accounting
standards and prevent the asymmetry of accounting information which would provide a single set
of high-quality accounting standards particularly for financial instruments (Mora et al, 2019). IAS
39 was known as rule based while IFRS 9 is based on principles and is expected to give more room
for complexities (Kfefvenberg & Viktoria, 2015). Up until the new amendment comes into force
banks are allowed to reclassify their financial instruments however, after 2013 only two categories

22
of financial assets remain which are at amortized cost or fair value though, banks will still be able
reclassify debt instruments from fair value to amortized cost (Barnoussi et al, 2020). It seems that
the IASB have been more flexible in their approach of inactive markets and have suggested that
during a financial crisis, under IFRS 9 banks will still be able to apply or move financial assets
from level 1 and 2 to level 3 in the fair value hierarchy.

6.1.1. Normative theory

Normative theory provides useful insight on how to formulate accounting standards which are
beneficial to users of financial statements. Many empirical studies focus on the normative theory
in their understanding of accounting principles which focuses on comparability when
implementing an accounting standard as what it ‘ought to be’ as opposed to ‘what it is’ employing
three models namely, inductive, deductive and decision-usefulness (Tinker et al, 1982;
Christenson, 1983; Mattessich, 1992). This theory comprises of two main ideas, true income and
decision-usefulness. Under true income there is no established measure of value and profit
therefore, theorists will only concentrate on a single measure. The decision-usefulness approach
portrays the view that accounting reports help aid investors in making more informed decision
(Abad & Suarez, 2017). This view is based upon five main assumptions; accounting is a
measurement system, the precise measurement of profit and loss, financial reporting is a useful
tool for decision-making, markets are inefficient and informational conventional accounting is
inefficient (Johannes, Dedy & Muskin, 2018). IFRS 9 is intended to replace IAS 39 therefore,
there is an emphasis on recognition and measurement issues making this theory relevant.
6.1.2. Classification of financial instruments under IFRS 9 - relevance during Covid-19

To understand whether the IASB have been successful in implementing and promoting greater
transparency and accountability of accounting standards the study will conduct a short and brief
examination of the implications of Covid-19. To stay consistent with the previous sections the
study will discuss the (re)classification of financial instruments under IFRS 9. Under IFRS 9, the
majority financial assets under IAS 39 have been divided into two measurements categories
namely amortised cost and fair value (CPA announcement, 2021). If assets are measured at fair
value, then gains and losses are entirely recognised in profit or loss (FVTPL) or fair value through
other comprehensive income (FTVOCI) (IASplus, 2021). Debt instruments must apply FVTOCI
though equity investment can electively classify financial instruments under FVTOCI. Under IFRS
9, subsequent measures of fair value after initial recognition are carried out through amortised cost,
fair value by OCI and fair value through profit and loss (Slavko, 2019).

Under IFRS 9 an asset can only be reclassified if an entity’s business model changes and in that
case the entity should reclassify all their financial assets. IFRS 9 is also largely based on the
23
business model rather than individual instruments which is preferred by standard setters as it can
be observed hence more relevant to users (Knezevic, Pavlovic & Stevanovic, 2015). However, a
change in an entity’s business model is very rare and this is especially true for financial institutions
who regulate on a specific business model, therefore the relevance of this to the banking industry
during Covid-19 would seem irrelevant. As well as this, IFRS 9 came into effective in 2018
therefore, it is difficult to predict its relevance though there is some empirical research emerging.
Furthermore, an entities business model only changes in the event of a business removing or
including a new business line or an acquisition (IFRS, 2021).
Though, the banking industry most certainly has been affected by the ongoing pandemic which
has resulted in many banks closing down many of their branches for example, Lloyd’s bank though
their business model remains unaffected even though they may need some internal reforms. This
question we leave for future research to decide.

7. Chapter Summary
It seems that the debate regarding fair value over historic cost will continue to be a topic of debate
in the eyes of many academics. In fact, the IASB and FASB in their revision of the conceptual
framework post-crisis have removed the term reliability; instead, the two most important
qualitative characteristics now concern relevance and decision usefulness (Botzem, 2014).
Geoffrey Washington (a former member of the IASB) has proposed that the accounting method
chosen will be based on the highest relevance and so the debate concerning which accounting
method is relevant will remain. However, the study by Markarian (2014) clearly outlines that this
debate has a long historical trail, while the report will not go further into this it must be noted that
every financial crisis or pandemic will bring about new development opportunities as well as
challenges which the IASB must be ready to undertake.

24
8. Methodology
8.1. Introduction
The initial idea of the methodology was to produce a systematic review of previous literature based
on meta-analysis however, the lack of literature available in this area did not allow for completion
of this task. Therefore, as an alternative the study hand collected data from banks annual reports
to produce a descriptive statistics analysis. This method was also mentioned as another way of data
collection in the ethics checklist therefore, there should be no obvious ethical issues. Furthermore,
since research is about development it does not constraint the researcher and there are multiple
methods of finding results to answer the research question.

8.2. Research Design

Once a literature covers a specific topic and research questions are developed, the study must then
look to the research design. The research design effectively creates a structured component which
creates a design for the researcher to be able to answer the research question there may be regarding
the topic (Rashid et al, 2019). The research design should be seen as a comprehensive planning
process for data collection and data analysis increased understanding of the topic (Abutabenjeh &
Jaradat, 2018)
8.2.1. Saunder’s research onion
Saunder’s research onion provides an effective method which help to analyse and interpret the
most appropriate approach for a research design. Saunder’s research onion consists of several
layers which involves research philosophy, approaches, strategy, research choices, time horizons
and the techniques and procedures (Melnikovas, 2018). The study will attempt to cover this to
justify the research design.
8.2.2. Research philosophy
Philosophy in the area of research perceives assumptions and the nature to serve research strategy
which is referred to as the science of research. Research is calculated against several philosophies
namely pragmatism, positivism, objectivism and interpretivism.

A pragmatist approach focuses on practical understanding of real-world issues. Pragmatism also

recognises individuals in a social setting may experience action and change differently which helps
them to be flexible in their approach of investigative techniques. Pragmatism will also encourage
researchers to take us from the world of practice to theory and vice versa (Keleman & Rumens,
2012). The positivism approach is of realism or common sense where knowledge is only generated
with the help of five primary senses. Positivists assume the world exists independently to
observation implying that the world is an objective reality which they use to test their hypothesis.
Under positivism, theory is tested to increase phenomenal understanding through quantifiable
25
variables and testing of hypotheses. Objectivists assume reality exists outside and reality is
absolute since the researcher thinks independently (Goldkuhl, 2012). Researchers who seek an
interpretivism approach will usually see the world as subjective realities and are interested in the
relativist which exists in a research issue. Under this, a researcher will perceive his own reality to
construct meaning (Goldkuhl, 2012). This study takes a positivist approach whereby quantifiable
variables are used to test the hypothesis.

8.2.3. Research approach

A research approach may initially be defined as broad but later become narrow and detailed as
theory is related within the scope. A research approach can either be inductive or deductive both
of which are seen to be research logic. An inductive research approach looks to developing theory
based off previous research whereas a deductive research approach looks at testing a hypothesis
or theory and arguments (Armat et al, 2018). This study takes a deductive research approach
because it looks at testing previous arguments in literature. Furthermore, to test the results we base
the work off previous research.

In research there are specific time horizons attached, these consist of two types namely longitudinal
and cross-sectional. Longitudinal studies span over a longer time often for more than one year
while cross-sectional studies will usually have a time frame attached to them (Saunder’s, Lewis &
Thornhill, 2009). In this case, the study takes a cross sectional approach since there is a time frame
attached to the study.

8.2.4. Research strategy

The research design will usually be divided into four components namely, a case study, action-
orientated research, qualitative and quantitative research method. Qualitative research often
focuses on complex and broad issues and is typically subjective in nature. Furthermore, qualitative
research will usually take an inductive research approach to develop theory since research is based
off individual interpretation (Corner, 1991). On the other hand, quantitative research will usually
be concise and narrow and is typically objective in nature. As well as this, quantitative research
will usually take a deductive research approach to test theory through statistical analysis and will
look at effect relationships through control variables (Rutberg & Bouikidis, 2018). In the interest
of this study a quantitative research strategy has been adopted since the research develops a
statistical analysis to test the effects of the reclassification of financial assets on company
performance through profitability ratios. Furthermore, the study looks at individual banks to
perceive the effects on cash flows, Tier 1 capital ratio and the income statement and balance sheet.

26
Due to the long-lasting effects of quantitative methods many researchers will train extensively in
quantitative methods as opposed to qualitative (Eriksson & Kovalainen, 2015). This study takes a
quantitative approach to answer the research questions in the form of a descriptive statistics
analysis. The variables used in the study are rate of equity and return on asset while RECLASS is
the dummy variable. Company performance can be assessed through profitability ratios which
measure economic effectiveness.
The formula for Rate of equity is as follows:
ROE = net income/shareholder’s equity
Du Pont’s model of analysis states ROE is a synthesis of many other financial ratios. Where the
ROE is high or is past the market interest rate suggests to shareholders or investors that the
company is in a good position and expectations for a larger dividend will also be raised
The formula for Return on asset is as follows:
ROA = net income/total assets
ROA is an effective profitability ratio to assess how well a company’s assets are managed.
During periods of economic downturn, the valuation of financial assets will usually follow a
downward spiral hence ROA can be used as a comparison for the current year’s ratio as well as
the previous or prospective years. Under the reclassification of financial assets (IAS 39) the
study will see the effect of this change on the income statement as well as the balance sheet
which in turn affects both the profitability ratios.

8.2.5. Research Choice

In the interest of this study a descriptive statistics analysis has been produced so that all data is
summarised into one. Statistics are a broad mathematical discipline which deal with different
techniques for collection, analysis, interpretation and the presentation of numerical data (Larson,
2006). The descriptive statistics will usually be broken down into a measure of central tendency
or variability. To measure central tendency the statistics, include mean and median while to
measure variability the statistics include minimum, maximum, quarterlies and standard deviation.
Descriptive statistics will usually describe and summarise all the available data in a meaningful
way.

A case study approach provides a researcher to explore an organisation or an individual to develop

interventions. For the purpose of this study, a subsample of 12 banks was drawn from the original
sample of 35 to include only those banks which used the option of HFT-LAR/HTM and another
subsample from the same 12 banks who also reclassified from AFS-LAR/HTM. This allows for
greater flexibility and an individual interpretation of each bank and to reach data saturation. A case

27
study method is one of the most widely used methods for conducting research though it is popular
amongst researchers looking to do qualitative research.

8.3. Sampling and Data Collection

Sampling and data collection is a tool which provides different methods on how data will be
collected.

8.3.1. Data Collection

Data can either be from primary or secondary research. Primary research can be defined as a data
collection technique which is collected first-hand while secondary research uses secondary data
sources whereby data has already been collected by another researcher and the literature is
available (Corner, 1991). Examples of primary data may include, surveys, interviews, focus groups
or market research. Primary research is usually considered to be more reliable and authentic. On
the other hand, examples of secondary sources may be published reports, journal articles, websites
and academic books. Secondary sources are a great method for market analysis. Where data has
been directly collected from census publications all data methods and possible inaccuracies are
displayed (Rabianski, 2003). This study has taken a secondary research approach using banks
annual reports to test the hypothesis.

8.3.2. Sampling size and procedure

The initial sample of banks included 192 banks from 16 European countries. The reason European
banks were used was because the IASB’s decision mainly affected European Banks. Banks annual
reports were hand collected for both the descriptive statistics as well as the case study approach.
The reason for hand collecting banks annual reports was the available resources were not
compatible with the requirements of Thomson Reuters to extract bank data. Furthermore, access
to Bankscope database could not be retrieved as the location would not allow its use though Yahoo
Finance was used for some statistical analysis regarding financial analysts. Of the 192 banks in the
initial sample, the study only used those banks which were either listed on the LSE, FTSE 100 or
their home country stock exchange which reduced the data further to 128 banks. The reason for
doing this was because those banks listed on the stock exchange publish their annual reports hence
it would be easier to find annual reports for the 3 years covered in the descriptive statistics. In
addition to this, the study removed and decoded duplicate banks for example HSBC, which
operates in almost every European country, which reduced our data further by 25 banks.
Furthermore, when synthesizing the data, it was found that 22 banks of the 103 remaining did not
reclassify which reduced the data down to 81 banks. When synthesizing the data to see which
banks did not reclassify, these banks were usually the largest banks in their home country or those
which could not meet the requirement of the amendment for example, Santander. This can be
28
explained by the fact that larger banks were provided government support or incentive in the form
of an equity stake therefore, had somewhat protection from regulatory pressures such as Credit
Agricole thereby our findings are consistent with Fiechter (2017), however this is in nowhere near
comparable since the data used in this study is lower by a large percentage. Of these 81 banks
some either reported reclassification very vaguely or did not have a 2007 or 2008 annual report or
the report was not available in English language which left us with a final sample of 35 banks to
cover the three years 2007-2009 which gave us 105 firm years annual observations. Our findings
are consistent with Fiechter (2011) in that most banks in the sample consisted of German Banks
followed by the UK. This can be explained by the fact that majority of German banks were
supported by the local government hence excessive leverage and risk-taking was high. Banks
would issue new debt at high rates and continued to do so for several years on a large scale which
explained the high rate of equity and return on asset as will be seen in the next section. Therefore,
when markets became illiquid major German banks were deeply affected (Georgescu & Laux,
2013). Major banks included Deutsche bank, LBBW, Handelsbanken, Commerzbank including
others. All currencies have been converted to Euros using OFX.com at the date of the
reclassification hence some banks data may be much lower after conversion. For the further
development of the results and findings, the study provides a quantitative research based on case
study using bank annual report to find out cash flows, profit and loss effect, tier 1 capital ratio and
the income statement. This will consist of the studies which used the HFT and AFS to LAR/HTM
category as this reclassification affects net income and equity. A total of 22 banks from the initial
sample used this reclassification option though the study only uses 12 banks with the highest
reclassification amount. Furthermore, not all banks provide enough data to carry out the analysis.

8.3.3. Sampling Decision

Many researchers question what the ideal number of a sample size is since an appropriate sample
size will usually be required for validity. Usually, the standpoint of a sample size should be more
than 30 so that there is enough data to extract the mean and standard deviation since the sample
size of 30 passes the threshold where anything below would be considered too small and normal
distribution can be considered valid (Noordzjj et al, 2010). Therefore, for this study a sampling
size of 35 banks would be appropriate to carry out the research for a descriptive statistics analysis.

8.3.4. Data analysis

Data analysis seeks to collect, model and analyse data which provides insights to support decision-
making. Examples of data analysis may include exploratory, descriptive and explanatory. The two
main objectives of exploratory data analysis include data collection and model formulation, though
the first may seem obvious however, the second may not be explicitly recognised (Chatfield,

29
1986). Under exploratory data analysis main characteristics are summarised in statistical graphs
or other visualisation methods. Descriptive analysis is used for the intention of summarising data
into tables of means and deviation to examine hypotheses (Moyle et al, 2015). An explanatory data
analysis explains the circumstance of why and how. In the interest of this study, a descriptive
analysis is created with a combination of explanatory data analysis to individually assess each bank
and understand why and how changes occurred to banks income statements and balance sheets.

9. Limitations
A research study is not without limits as was the case with this study too. Though a sample size of
35 is considered appropriate it is not large enough to understand the full effects of the independent
variable against the dependent variable. Furthermore, due to a lack of funding for this study, a
larger sample size could not be extracted. As well as this, primary research in the form of
interviews with banks regulators would be a useful method of creating theory however, contacting
bank regulators is a difficult process. Furthermore, interviews would be conducted through online
communication methods such as Zoom, or Skype and connection issues can sometimes create time
lags between processes. To add to this, there is very little research with regards to how the
reclassification of financial instruments under IFRS 9 could potentially affect the banking industry
though the study leaves this as another research idea for researchers. Furthermore, since the
pandemic is still on-going it is difficult to assess the full magnitude of the crisis though this would
have provided a better approach to the study. Descriptive statistics analysis is also limited in the
sense that only summations can be made hence it cannot be generalised.

10. Ethical Considerations

All data extracted for the purpose of the methodology has been found from bank’s annual reports
and of those banks which are listed on the stock exchange therefore are public listed companies,
hence the information is public and readily available thereby avoiding any ethical issues which
could have been raised. Despite this, in the analysis the study will keep bank names as anonymous.

30
 11. Results and Findings
The findings for the studies were found from 35 banks annual reports across 2007-2009 which
equals to 105 firm-year observations. The study has created a descriptive statistical analysis and
has taken a case study approach to see how the effects of the reclassification of financial assets
under IAS 39 has affected bank’s financial reporting. In doing so the study has used the effects on
profitability ratios, ROE and ROA where RECLASS is used as a dummy variable. This chapter is
split into three sections. Firstly, the descriptive statical analysis provides the mean reclassification
amount and the effects on ratios and ROE and ROA. Secondly, the study uses 22 banks from the
initial sample of 35 which used HFT-LAR/HTM since this category affects net income. This
section assesses the effects on cash flows, Tier 1 capital ratio, profit/loss, the income statement
and balance sheet.

In doing so the study answers the first research question which assesses whether the IASB’s
decision regarding the financial crisis was appropriate. To keep the report concise the study only
focuses on the amendment to the reclassification of financial instruments under IAS 39 as covering
every amendment to accounting standards is not possible and the study will leave this to future
research who may use a single standard or multiple. From the annual reports the study will also
assess whether those banks which reclassified their financial instruments under IAS 39 from fair
value to amortised cost were successful with profitability through ROE and ROA; thus, the study
answers the second question of whether fair value holds a higher relevance value than historical
cost during economic downturns.

Lastly, in the recommendation section the study will extend the literature review to answer the
third research question by providing recommendations for future research as has been done on the
effects of the reclassification of financial instruments under IAS 39 and in this case on the new set
of rules under IFRS 9 (the replacement of IAS 39) as directions for future research.

11.1. Descriptive Statistics Analysis

For the descriptive statistical analysis, we base our model from Fiechter (2011). (Figures are in
million euros). RECLASS acts as a dependent variable while Ratio, ROE and ROA act as the
independent variable.
VARIABLES RECLASSIFICATION No. Mean Min Q1 Median Q3 Max Std.dev
RECLASS All 35 10807.8 2 576 3633 10000 99100 20773.7
HFT-LAR/HTM 22 8721.865 0.028 212.25 1189.5 8910.75 99100 21041
HFT-AFS 17 2531.691 0.74 219 451 2485 15795 4235.614
AFS-LAR/HTM 19 7280.236 0.8 105 1841 3746 78000 18021.72
RATIO RECLASS/TOTA08 35 0.1746 0.0012 0.0223 0.0536 0.2289 0.7962 0.2415
ROE

31
 ROE07 35 0.2554 0.0020 0.1432 0.2383 0.3441 0.9346 0.1875
ROE08 35 0.3746 0.0022 0.2277 0.3182 0.4829 0.9561 0.2583
ROE09 35 0.2716 0.0105 0.1462 0.2342 0.3918 0.6977 0.1829
ROA
ROA07 35 0.2626 0.0017 0.0203 0.0676 0.4993 0.9781 0.2953
ROA08 35 0.2706 0.0101 0.0190 0.0497 0.5072 0.9843 0.3174
ROA09 35 0.2651 0.0105 0.0157 0.0325 0.4755 0.9728 0.3378
Table 1: Descriptive Statistics

1/3 of the banks reclassified retrospectively during July 2008 while the remaining prospectively
reclassified between October and November 2008. The mean reclassification amount of the 35
banks in our sample was 10,807 million euros which suggests the provision was widely used by
European banks. Figures may be high since the sample size is small while mean is calculated
across an average. Of the 35 banks 22 banks used the option of HFT-LAR/HTM with a mean
reclassification amount of 8721 million euros. The reason this option was used widely was because
fair value losses were not recognised in the income statement hence it would affect net income.
Furthermore, fair value was now carried at amortized cost. For HFT-AFS the study finds a mean
reclassification amount of 2531 million euros however, since this reclassification is still measured
at fair value there is no effect on equity or regulatory capital, though fair value gains and losses
are recognised in other comprehensive income. Lastly, the mean reclassification amount for AFS-
LAR/HTM is 7280 million euros. Since fair value is now measured at amortised cost this affects
other comprehensive income. From Table 1 we also find that ROE in 2008 is higher than in 2007
though we see a dip in 2009 again. This can be explained by the fact that almost all the banks
within the sample did not reclassify during 2009 and by that time markets became somewhat liquid
though not entirely. Of the banks which are not within the sample reclassified during 2009, not in
2008 however we are interested in seeing the immediate effects. From Table 1 we also see an
increase in ROA in 2008 with a stable increase in 2009 too.

11.2. Case study approach

As mentioned previously banks which used the HFT to LAR/HTM option did so as they would
not need to recognise any unrealized fair value losses within the income statement. The study now
takes a case study approach through a quantitative research analysis to individually assess those
banks which used this option for a deeper analysis on cash flows, gains and losses, tier 1 capital
ratio and the income statement. Not all banks have information regarding OCI, since before 2009
it was not mandatory to show OCI with the income statement since companies wanted to keep
their income statements more profitable while record losses in the statement of comprehensive
income. As well as this, cash flow is important to bank as it indicates a business’s cash position to
investors as more money is coming in than going out. For the purpose of this section all currencies

32
have been converted to euros using Ofx.com at the date of reclassification. All information has
been extracted from the disclosures from 2008 annual reports. Amount released to consolidated
income and balance sheets are done at the effective interest rate.

11.3. Bank analysis

Bank A’s Tier 1 capital ratio reduced by 0.3% in 2008. The bank reclassified financial assets of
135 million euros out of HFT into LAR/HTM in 2008. Had the reclassification not taken place a
net loss of 28 million euros would have been recognised in the income statement from gains and
losses on fair value measurement. Furthermore, the bank reclassified AFS into LAR/HTM with a
fair value of 2949 million euros, the effect of the reclassification meant a further net loss 548
million euros was avoided in equity. 4,164 million euros estimated to be achieved in cash flows
from the reclassification. As well as this, had the reclassification of these financial assets not taken
place the bank’s regulatory capital would have depleted further as it would have had a direct effect
on asset valuation.

Bank B reclassified trading assets to loans and receivables with a fair value of 13.7 billion euros
during the period 1st October and 31st December 2008. The bank expected a recoverable cash flow
of 33.6 billion euros from this. Had the reclassification not taken place an additional 3.2 billion
euros of fair value losses would have been recognised in the income statement at the end of the
year. The reclassification contributed a further 0.2 billion euros to net interest income less a credit
loss expense of 0.8 billion euros therefore, profit before tax had a negative impact of 0.6 billion.
A negative impact would be expected since the bank has experienced a large increase in credit loss
from the year prior from 159 million euros to 2013 million euros. Tier 1 capital ratio for the year
also increased by 11%.

Bank C reclassified HFT and AFS assets to loans and receivables as of 31st December 2008 with
a fair value of 29,345 million euros. The decrease in value is attributable to the dollar getting
stronger against the euro. The bank expected a recoverable cash flow of 17.6 billion euros on AFS
assets while 15.2 billion euros on HFT assets. The main objective of the reclassification was to
increase income before taxes by 3.3 billion euros. A company may want to increase their income
before taxes because companies want to increase profitability so they can give their shareholder’s
better returns which would reflect a good performance of the company in stock markets and is
used as an important tool to measure performance of company management too. Had the
reclassification not taken place the income statement for the year would have included 3.2 billion
euros of unrealized fair value losses on trading assets while a further 209 million euros on available
for sale debt securities. Furthermore, shareholder’s equity would also include an additional 1.8
billion euros of unrealized fair value losses. Tier 1 capital ratio increased by 1.5% in 2008.
33
Bank D reclassified financial assets from HFT and AFS into LAR/HTM with a fair value of 2726
million euros. Had the reclassification not taken place -47 million euros would be recorded in
valuation yield against -21 million euros in the year prior while -70 million euros from revaluation
reserves against -26 million the year prior. 43 million were recorded from the actual impact of the
reclassifications on the income statement. The bank expects a recoverable cash flow of 2988
million euros from the reclassification. Tier 1 capital ratio increased from 6.2% to 7.5%.

Bank E reclassified a fair value of 3,505.4 million euros of HFT assets into LAR/HTM and AFS.
Had the reclassification not taken place net trading income ending 31st December 2008 would be
lower by 343.7 million euros equivalent of 278 million euros net of tax A fair value loss of 147.1
million euros before tax were recognised in equity post reclassification while 187.3 million euros
of debt securities were recognised in interest income while 0.7 million euros was recognised from
equity securities in dividend income. Had the reclassification not taken place, net trading income
would have been 259.6 million euros lower while net of tax would have been 110.3 million euros
higher. The bank expected a recoverable cash flow of 5,321.8 million euros. Tier 1 capital ratio
increased by 0.1% and 0.8% in accordance with Basel II.

Bank F reclassified assets from HFT and AFS into LAR/HTM with a total fair value amount of
3547 million euros. Had the reclassification from HFT into LAR/HTM not taken place a loss of
358 million euros would have been accountable in the income statement, a 181 million increase in
loss since 1st July to 31st December 2008. Post reclassification, 32 million euros have been
recognised in net interest income. The bank expects recoverable cash flows of 3,524 million euros
from this reclassification. Since the reclassification from AFS into LAR/HTM place 3.09 million
euros have been recognised in net interest income. The bank expects 864 million euros of
recoverable cash flow. Tier 1 capital ratio in accordance with Basel II stood at 11.2%.

Bank G reclassified financial assets from HFT into LAR/HTM with a fair value of 4,184 million
euros. Had the reclassification not taken place the banks would recognise unrealized fair values
losses of 1.54 million euros within the income statement. Prior to reclassification net income stood
at 17,650 million euros while 15,780 million post-reclassification, though reclassification assets
amounted to 4.1 million euros in income before taxes. Furthermore, shareholder’s equity increased
by 15,590 million euros. The bank expects a recoverable cash flow of 7.6 billion euros. Tier 1
capital ratio increased by almost 2.5% from 11% to 13.5%.

Bank H reclassified financial assets from HFT to LAR/HTM with a fair value of 8992 million
euros. Had the reclassification not taken place pre-tax profit would decrease by 1,851 million
euros. The bank also retrospectively backdated to 1st July 2008 which avoided a 600-million-euro
34
fair value movement on the income statement. Prior to the reclassification a loss of 583 million
euros was recorded in the income statement from HFT assets while a gain of 263 million was
recorded post reclassification. Furthermore, assuming the reclassification did not take place a loss
of 1,450 million euros would be recorded in the income statement. Further loss before tax would
have been 0.67 billion higher. The bank expects a recoverable cash flow of 15 billion euros from
this reclassification. Tier 1 capital ratio decreased by 1% from 9.3% to 8.3% though the bank still
hit their regulatory capital target.

Bank I reclassified financial assets from HFT to LAR/HTM with a fair value of 13,709 million
euros. A large amount of total asset increase was accounted for from the trading portfolio
reclassification effect. Net interest income stood at 4,059 million euros of which 127 million was
contributed by the reclassification, however the bank claimed that even without the reclassification
net interest income still increased by 4.8% from the year prior. Had the reclassification not taken
place a loss of 1,792 million euros would have been recorded from mark-to-market valuation.
Furthermore, 1,856 million euros before tax is totalled on the income statement which avoids any
loss from mark-to-market valuation.
There is no mention of effective interest rate or recoverable cash flow within the annual report.
The tier 1 capital ratio stood at 14.3% which stands exceptionally well with international standards,
this is also unsurprising as it is one of the largest German banks.

Bank J reclassified financial assets from HFT and AFS into loans and receivables with a fair value
amount of 25,256 million euros. A 4 million increased on profit by tax resulted from the
reclassification and a 3 million euros effect on net income. Had the reclassification not taken place
unrealized fair value losses from HFT of 66 million euros would be recognised. Had the
reclassification from AFS not taken place AFS securities would increase a revaluation reserve of
a loss of 1783 million euros from 1st July to 31st December 2008. The bank expects a recoverable
cash flow of 29,713 million euros from the reclassification. Tier 1 capital ratio increased from
6.5% to 6.9%.

Bank K reclassified financial assets from HFT into LAR/HTM with a fair value of 4020 million
euros. Had the reclassification not taken place, tax effect would have a negative amount which
totals 141 million euros on the income statement whereas 212 million euros of valuation reserves
under shareholder’s equity before tax would have been discounted.
There was no mention of effective interest rate or recoverable cash flow. Tier 1 capital ratio
increased from 6.5% to 7.1% in 2008.

35
Bank L reclassified assets from HFT into LAR/HTM and AFS into LAR/HTM with a fair value
of 12 and 40 million euros. Had the reclassification not taken place unrealized fair value losses
from HFT of 940 thousand euros would be recognised in the income statement. Post
reclassification an unrealized fair value gain of 337 thousand euros was recorded in the income
statement. As for shareholder’s equity had the reclassification from AFS not taken place 3 million
euros of unrealized fair value losses would be recorded on the balance sheet. Post reclassification
37 thousand euros contributed to income before taxes. The purpose of the reclassification was to
increase income before taxes by 282 thousand euros.
Tier 1 capital ratio increased from 8.8% to 10.1% in 2008 in accordance with Basel II accord.

Despite Tier 1 capital ratio decreasing for some of the banks at the end of 31st December 2008 all
banks within the sample were still within requirement of the Basel II accord prior to reclassification
which is usually above 4% suggesting that the banks were not necessarily opportunistic or solely
motivated by bank characteristics. Furthermore, of the banks which did not reclassify within the
sample also had a steady increase in regulatory capital though these were also the large banks of
European countries.
11.4. Empirical studies on the reclassification of financial assets under IAS 39 (results and
findings)
All studies assessed in this section have focused on the banking industry which comply with IFRS
and are in the context of the 2008 financial crisis.

The study conducted by Fiechter et al (2017), assesses the decisions of the too-important-to-fail in
reclassifying their financial assets out of fair value on 213 European banks. The study conducts a
probability regression model using RECLASS as the dependent variable, while Tier 1 capital and
reclass categories act as independent variables. The study finds that majority of the banks used the
HFT-LAR/HTM category. The study also finds that the TITF banks were less concerned with
regulatory capital effects from reclassification unlike the non-TITF banks. However, there was an
insignificant difference between TITF and non-TITF banks regarding reclassification though the
study was able to suggest that reclassification conditions are not only based upon regulatory capital
or other bank characteristics. The mean and median were either insignificant or marginally
significant relevant to bank characteristics concerning TITF and non-TITF banks.

The study conducted by Fiechter (2011) assess the effects of reclassification on bank’s financial
statement using a descriptive and univariate analysis on 76 European banks and finds that majority
of banks used the HFT-LAR/HTM category. The study also suggests that due to the application of
the amendments net income increased mean ROA by 0.5% while the mean ROE by 2.7% while
Tier 1 capital increased at a significant 1% level. Therefore, the study claims that financial
36
institutions who were pushing for these amendments was apparent however, this did not mean the
risk portfolio to those financial instruments has decreased.

The study conducted by Lim et al (2013) assesses the effects of reclassification on analysts earning
forecast on 79 banks. The study found that analyst forecasting accuracy was reduced during 2008
when the economic conditions were volatile. IAS 39 amendment is an endogenous choice, and the
study assesses that there is endogeneity between reclassification and analyst forecast properties
though controls this through the Heckman two-stage procedure. The study found a mean and
median forecast dispersion for reclassifying banks is a significant 1% level lower while accuracy
mean, and median is lower at a significant 1% level.

The study conducted by Paananen et al (2011) tests the reclassification behaviour of banks against
capital market consequences using a total of 95 banks both reclassifying and non-reclassifying of
which 43 have reclassified. It hypothesises that majority of banks reclassified to the HFT-
LAR/HTM or AFS option as they were motivated by earning management incentives and volatility
concerns. The study used a probability estimation where the dependant variable was RECLASS
against capital adequacy ratio. In contrast to Fiechter (2017), this study finds that larger banks are
more likely to reclassify since the capital adequacy ratio is lower than small banks. There is a
negative correlation between capital adequacy ratio and reclassification while a positive
correlation between financial holdings and the probability to reclassify. It was found that banks
who reclassified out of fair value had a lower value relevance regarding their financial information
as they were opportunistic.

The study conducted by Bischof et al (2019) tests the effects of the reclassification of financial
instruments on bank recapitalization using a sample of 302 banks using country-specific prudential
filters. The study uses a cross-sectional model and attempt a robust standard error to adjust for
heteroscedasticity with reclassification being the indicator variable against reclassification choices
while ROA and risk-weighted assets are used as control variables. The study observes a negative
correlation between the choice of asset reclassification a bank’s ROA and suggests that to increase
equity capital banks will prefer the use of internal funds.

37
12. Conclusion
The study examines the effects of the reclassification of financial instruments under IAS 39 and
whether the decision to reclassify out of fair value to amortized cost had a positive effect on
company performance through ROA and ROE. The study further assessed individual banks
performances regarding cash flow, Tier 1 capital ratio, gains and losses and the effect on the
income statement and balance sheet. The findings conclude that the reclassification had a positive
impact on the income statement, balance sheet and regulatory capital however, this does not mean
the risk attached to the assets decreased in any way, in fact the transparency of financial reporting
was further reduced. Furthermore, it is also not surprising that 3 of the banks within the sample
were provided government support during the financial crisis to remain stable and these were the
larger banks within UK and Germany. To add to this, it is unclear whether reclassifications have
a short or long-term effect on bank characteristics, though assessing the dip we see again for
ROE09 and ROA09 may suggest that there is a short-term effect on assets and net income. Despite
seeing an increase in Tier 1 capital ratio many of the banks within the sample were already within
the Basel II accord thereby suggesting banks were not necessarily opportunistic though they
wanted to mask the volatility on assets from fair value movements to investors so financial
statements could remain profitable.

In terms of the first objective in assessing the role of the IASB as an accounting standard setter
and the first research questions which was to know whether the IASB ‘s response to the financial
crisis was appropriate, the study concludes that political lobbying is an inevitable aspect of policy
setting though it undermines the legitimacy of an international governing body. Several studies
have outlined the IASB’s governance structure through the lens of the legitimacy theory and power
asymmetries through the agency theory. During the 2008 financial crisis there was a large debate
concerning the IASB’s governance structure though it was clear that political intervention played
a huge role in standard setting. This sort of political lobbying is unsurprising as external parties
will use this to bring about outcomes which benefit their interests. Furthermore, in 2004 a former
member of the IASB had clearly outlined that if political interference prevails in such situations,
it undermines the IASB to act independently in this case. Despite this, the reclassification option
to reclassify financial assets under IAS 39 was widely used by banks even some of the largest
banks of European Countries.

The second objective was to assess whether the reclassification option to reclassify financial assets
under IAS 39 was appropriate which we also used to base the second research question which was
to understand whether fair value holds a higher relevance value than historical cost during
economic downturns. Though fair value is preferred by accounting standard setters as it provides
clarity and transparency to investors, many studies claimed it caused a pro-cyclical contagion and
38
banks even called for the suspension of fair value accounting. As a response to the financial crisis
the IASB allowed for the option to reclassify financial assets out of fair value into amortized cost.
From the analysis we have found that reclassification financial assets helped banks increase their
regulatory capital as well as avoid fair value unrealized losses on the income statement hence ROE
and ROA in 2008 were higher in 2008 than in 2007. However, there are only a handful of studies
or relatively recent studies which have researched upon this reclassification under IAS 39 though
there is still a need for further development within this area as it can help to understand impacts
on future financial crises. Markets are unpredictable and are not immune to market volatility
therefore, using the 2008 financial crisis in consideration and the option to reclassify is still
important for future accounting standard decisions.

In terms of the third research question the study wanted to assess whether the reclassification
option under IFRS 9 kept economic downturns into consideration hence we based the research
question on whether the IASB kept the 2008 financial crisis in hindsight in their response to Covid-
19. Since the pandemic is relatively new and IFRS 9 has not been tested in a market failure
environment there was very little market research relating to the reclassification of financial assets
under IFRS 9 during Covid-19 though assumptions were provided in the literature review on how
banks would potentially reclassify under IFRS 9. It is exceptionally difficult for banks to do so
considering reclassification in this case can only be done if the bank’s business model changes or
a new line of business is eliminated or added. For a bank to change their business model is very
rare hence, whether this reclassification has provided appropriate support for banks during Covid-
19 is questionable though, this must be seen in future research. Therefore, the study will provide
recommendations for future research regarding this aspect.

Based on the findings it would be appropriate to say that the IASB’s decisions as an accounting
standard setter are for the betterment of society. Since their decisions have been proven to be valid
in helping the global banking industry recover from the 2008 financial crisis by many researchers
their decisions should be welcome. Furthermore, since their motive is also for the betterment of
society hence their decisions should remain independent to political lobbying processes.

Though the research may have answered the research questions and achieved the aims and
objectives that were set out no research is without limitations. The findings of this study are in no
way comparable to the findings of other studies as the sample size is lower by a large percentage.
As well as this, researchers are focusing relatively less on the IAS 39 reclassification option
therefore, it’s relevance in the near future of studies is questionable which is why we provided an
extra section relating IFRS 9 which could be used by researchers to develop further on.
Furthermore, the banks have been sampled in terms of who has applied the reclassification not by

39
asset some of these banks may have larger assets or shareholder equity or net income, so in between
themselves in terms of ROA or ROE are neither comparable therefore, as can be seen from ROE08
some of the larger banks contribute heavily which explains the large increase from the year prior.
Furthermore, mainly German banks contributed to this and as established previously, German
banks were supported by their government therefore, they actively took part in excessive
leveraging and risk taking which is why their asset valuation and equity was high.

13. Recommendations
Another layer of the research onion is approaches to future research under Saunder’s research
onion. Under this model, future studies can be based upon four factors. Firstly, empirical studies
which is predictive, secondly through competing future images based on interpretive, thirdly
focusing on who benefits from the research, which is critical and lastly, focusing on developing
the future based on participatory learning. In this section we provide recommendations for future
studies and how this study can be further developed by researchers who may want to base their
framework on this study.

Based on the findings of this study, there are a few recommendations which future studies can
consider. Researchers should consider the short and long-term effects of the reclassification of
financial assets under IAS 39 as this has not been previously considered by researchers.
Furthermore, each category of reclassification should be treated individually so the researcher can
base the short- and long-term effect based upon which is most relevant to banks and which would
provide the longest-term effects. Furthermore, researchers can also create a comparison between
effects of reclassification of financial assets between US banks following US GAAP and European
banks following IFRS to assess who had a greater impact on this will also help assess whether
there are any alignments between both accounting standards since the IAS 39 amendment was also
created to be better aligned with US GAAP. In addition to this, researchers can only consider
creating a comparison between the banking industry and manufacturing industry who applied the
IAS 39 amendment to understand which industry had the largest benefit of reclassifying financial
instruments.

Since many researchers blame fair value estimations for exacerbating the financial crisis and
creating a pro-cyclical contagion it would be interesting to see whether had historical costing been
applied as opposed to fair value estimations could this have prevented the collapse of the large
banks in the global banking industry.

Relative to the third research question a recommendation to provide future research would be to
extend the research conducted within the framework of IFRS 9 and present a research study based

40
on a single case study of a bank. The reason for using a single case study approach is it helps
identify every possible effect on a firm which provides for high analytical findings. There is
relatively less market research available regarding the reclassification of financial assets under
IFRS 9 on the global banking industry therefore the study recommends bridging the gap between
the recent IASB’s governance structure and their independence in creating IFRS 9 in a theoretical
framework and their decision relating to Covid-19. A comparison relative to the previous
recommendation regarding IAS 39 can also be applied to IFRS 9 whereby researchers can assess
two industries or sectors of the banking industry to see who the reclassification option benefits the
most. An example could be, that we assume that soon all banking systems are digital, whether the
reclassification option would provide any relevance in this case. As well as this, the technology
industry is susceptible to business model changes through mergers and acquisitions and adding
new lines of business. Furthermore, it would be of great interest to consider Covid-19 into this
study.

However, it must be considered that these recommendations are based solely on predictions and
assumptions therefore are possibly understated. The reason being is the future is unpredictable and
unforeseeable therefore, many future studies even fail or according to scientific knowledge a lack
of scientific basis may fail to provide exact future predictions.

41
Appendix A

Hafsa Hakeem

17004684

Research Proposal

‘The effects of the 2008 financial crisis on accounting standards within

the global banking industry and the implications it has had on the
response to Covid-19’

42
Introduction
Setting accounting standards which reflect current situations of the economy are important to
provide transparent, unbiased information reflecting the true value of the company through
financial reporting. Changes to accounting standards are made by the International Accounting
Standards Board (IASB) and Financial Accounting Standards Boards (FASB) (US). This
provides shareholders and stakeholders with as much accurate information as possible to make
their investment choices.
Financial institutions were the centre of the 2008 financial crisis; therefore, the research focuses
on the global banking industry. The main concept surrounding the 2008 financial crisis was of
fair value which has been a much-debated topic for many decades as the void between fair value
asset and book value asset simply cannot be filled which becomes complex during economic
downturns and is a topic of heated debate.
The purpose of including Covid-19 is that it is a relatively new area of research, therefore, is
actively being researched upon. The purpose of this research is to extend previous literature on
the criticisms relating to changes made by the IFRS and IASB while also adding new research
through Covid-19. Making comparisons with both crises allows for further knowledge on
whether the accounting standards board are prepared for the next financial crisis while
identifying similar and contrasting patterns.
The purpose of this report is to gain an understanding into the complexities of financial reporting
during economic downturns and financial distress and external contributing factors which add to
these complexities. This is a short insight of the wider picture which will be deeply analysed in a
later report on understanding both the criticisms made by authors and authors who are in favour
of the changes made to accounting standards by the IASB and FSAB during the 2008 financial
crisis. Based upon these effects it is important to understand whether the IASB and FASB were
better prepared in responding to the challenges posed by Covid-19.

Literature review
The conceptual framework assists the IASB and FASB in making changes to the International
Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles
(GAAP). The centre of the changes surrounded IAS 39, IAS 32 and IFRS 7 which were
controversial and highly criticised. IFRS was made mandatory to be applied to financial
institutions within the EU after 2005. The presentation of financial measurement is outlined by
IAS 32. Further clarification of the measurement of financial assets and financial liabilities was
outlined by IAS 39 however, due to its confusing nature it was revised as IFRS 9 in 2008. IFRS
9 is specific and applicable to banks. Under this measurement financial assets were to be

43
recognised at fair value on initial recognition. Furthermore, IFRS 7 requires firms to include the
fair value of assets and liabilities in disclosures.

The 2008 financial crisis was recorded as one of the worst crises to have hit the global economy
since the Great Depression in 1930. Market liquidity dried up hence valuation was difficult to
predict, and extensive losses were recorded by financial institutions (Bowmen et al 2010). Well-
established financial institutions for example, Royal bank of Scotland, Bank of America
overtaking Merrill Lynch, Northern Rock and the Lehman Brother including others were
affected.

When the financial crisis hit in 2008, there was immense political pressure on the accounting
standards board to amend the fair value measurement. In an attempt to correct measures the EU
and US Congress urged the IASB and FASB to revise the financial instrument standards
(Ehalaiye, Tippett & Zijl, 2017). IASB was forced to proceed without the usual standard
proceeding in its revision. The amendment to IAS 39 by the IASB was one of many amendments
which included the option to reclassify investments from fair value to historical cost as a
response to avoid the collapse of financial institutions. The reclassification of the fair value
category ‘held for trading’ moved to cost categories ‘loans and receivables’ and ‘held to
maturity’ which was successful in increasing capital (Fietcher et al 2017). A recent publication
has outlined a hypothesis believing the too-important-to-fail banks took less advantage of this
provision to protect their Tier 1 capital because of the political protection they enjoyed (Fiechter
et al 2017).

Banks also called upon the suspension of fair value. However, the hypothesis relating to whether
the decision to allow banks to use historical costing was strategic must be analysed. Recent
publications extending previous studies strongly support fair value estimations stating it provides
forward-looking information which is transparent and in times of financial crisis is important to
provide the economic value and risk associated with assets and liabilities (Menicucci & Paolucci
2016; Haswell & Ewans 2018). Historical costing, however, becomes irrelevant overtime as it
only provides past information therefore, recognition of impairment of losses is not timely (Liao,
Kang & Morris 2020).

A criticism of fair value is that during economic booms, it contributes to excessive leverages
while in an economic downturn it causes excessive write-downs thereby making it a heavily
criticised topic. Excessive write-downs deplete bank capital forcing banks to sell assets at fire-
sale prices. Many authors for example, Cifuentes, Ferrucci and Shin (2005) and Plantin, Shin and
Sapra (2008) in their theoretical model strongly favour the view that fair value accounting causes
a pro-cyclical contagion whereby the actions of one bank selling assets at fire-prices means

44
another bank will also follow leading to the collapse of the banking system (Abad & Suarez,
2017; Kruger et al, 2018). Banks with higher adequacy ratios are in a better financial position
hence will hold their assets to maturity (Goh et al, 2015). Furthermore, Allen and Carletti (2007)
state fair value estimations are affected by other factors besides just asset fundamentals
especially when market are illiquid. The key to understanding whether fair value is an effective
accounting method during financial crisis is to see how investors perceive fair value estimations
as market conditions fluctuate (Laux and Leuz (2009); (2010). However, the methodology of fair
value is also a topic of debate as it has different calculation methods, using all these
methodologies makes it difficult to project future financial statements. Estimating fair value is a
much complex process and reflecting on financial instruments in the future would be difficult to
predict. The study must consider three theories relevant to fair value; depreciation theory, asset
theory and profitability theory to assess fair value against historical costing (Osho, 2020).

It cannot be denied by many authors for example, Noike (2009) and Bengtsson (2011), that
political pressure plays a huge role in influencing these changes. However, the key element not
to be missed here is the revaluation of bank assets is necessary to continue on-going investments
to prevent financial institutions collapsing. This issue has quickly spiralled into one of politics
and economics. In this sense, accounting standards board should be independent of their
decision.

In comparison, Covid-19 has proven to have had the worst implications on the global economy
far greater than the 2008 financial crisis. To stay consistent with the previous study this section
will examine IFRS 13 and IFRS 9. Although some regulations had been developed pre-crisis for
example, IFRS 13 in 2013 which has widened the criteria and has provided definition to fair
value changes made to reflect current situations are inevitable (Hashim, Li & O’Hanlon, 2019).
Publications released by IASplus have mentioned that banks must consider their revision of
financial instruments carefully.
As market liquidity has decreased once again banks will look to whether some financial
instruments need to be moved to level 2 or 3 in the fair value hierarchy. Additionally, valuation
methodologies may need to be changed to reflect the current crisis.
There is considerably less market data available for financial institutions. Since the crisis is still
ongoing the true impact on financial institutions will be seen although some market research is
emerging.
The EU urged the IASB to widen the requirements under IFRS 9 and an amendment was
released by 2017 (Giner & Mora, 2019). IFRS 9 has not been tested in a market failure
environment hence to prove the effectiveness of this will take some time. The amendment to
IFRS 9 now includes a new model on expected credit loss, since this a new model there is not

45
enough data to prove its effectiveness (Barnoussi, Howieson & Beest, 2020. The report will
instead consider assumptions based on the period pre-crisis and 2008 to assess how the changes
by IFRS and IASB will affect financial institutions currently. The report can also assume that
different geographical locations will have different effects from data available pre-crisis and how
different banks will be affected differently.

Research questions
RQ1 – To what extent was the role of the accounting standard bodies during the 2008 financial
crisis appropriate and timely?
RQ2 – To what extent do fair value methods hold a higher relevance value than historical costing
during economic downturns?
RQ3 – How did the accounting standards board’s use the 2008 financial crisis in hindsight in
their response to Covid-19 issues for the global banking industry?

Methodology
Research Design
Saunder’s research onion is an effective method to analyse and interpret appropriate research
methods. A research approach is shown in two ways, inductive and deductive. An inductive
research approach develops new theory based off existing research whereas a deductive approach
designs a research strategy to test the hypotheses where research begins from particular to
general. In this case the study takes a deductive approach to the study.
A research design is a structural component which create a design for the researcher to be able to
answer the research questions he has. This is generally divided into four components: a case
study, action-orientated research, qualitative or quantitative research methods. This study takes
the approach of a quantitative research method to explain phenomena in the form of statistics. A
quantitative research method in the form of a meta-analysis will take place. Quantitative research
methods look to testing theory as opposed to building on theory. This provides great relevance to
this study because the study wants to test the research questions so that conclusions can be drawn
on the effectiveness of accounting standard boards decisions. In terms of time horizons these
involve two types namely longitudinal and cross-sectional. In the case of longitudinal research is
conducted over a long period of time whereas with cross-sectional research has to be completed
in a specific time frame which in this case the study has a cross-sectional approach (Saunders,
Lewis & Thornhill, 2009).

Sampling Decisions
The study first checks to see how financial institutions are affected by decisions made by
accounting standards bodies. For this, the study will create a comprehensive meta-analysis of
46
those studies which have used the European and USA financial institutions since these financial
institutions comply with the rulings of IFRS and IASB. The study seeks to see the studies which
have used the financial reports of these banks to identify fair value adjustment to test the
hypothesis on whether the decision of IFRS and IASB on fair value was logical and how this
affects financial institutions during economic downturns.
The study will also add its own contribution for the second set of data. Using the too-important-
to-fail banks the study examines the effect of the new expected credit loss model, before
implementation and after implementation to assess which provision has affected financial
institutions the most. Based on the findings, the study will use the results to analyse the current
pandemic and provide assumptions on the usefulness of the new model. The study will examine
the period 2017-2020.
Sampling Size and Procedure
For the first set of sampling the study conducts a meta-analysis of various studies. To do meta-
analysis the correct way the studies must be synthesized and coded in terms of relevance. For
this the search should follow a systematic order to capture relevant studies in the area. Key
words include ‘fair value’, ‘historic costing’, ‘IFRS 9’, ‘IFRS 13’, ‘accounting standards bodies’,
‘financial crisis’, ‘expected credit loss’.
There are three main themes to meta-analysis. Firstly, the literature must be synthesized to
provide transparency and reproducible results for future guidance and research (Stewart, Moher
& Shekelle, 2012). Secondly, meta-analysis looks to synthesize quantitative data from different
studies which combined would help solve the research in question (Pigott & Polanin, 2019).
Through quantitative meta-analysis the study can identify critical moderator variables which
explain part of the heterogeneity between effect sizes. The final theme in meta-analysis relates to
the gap between existing methods of meta-analysis and emerging meta-analysis. In this research,
meta-analysis can be conducted on the reforms introduced by accounting standards bodies
against company performance using performance measures such as ROE. The results to draw a
conclusion on this can only be derived from quantitative meta-analysis in a regression model
analysis.
To provide reliable conclusions in the meta-analysis method, the study attempts to assess control
for endogeneity or multi-collinearity although it is a much complex process to identify missing
variables.
For the second set of data the study follows the same sampling method. To prove the hypothesis
that meta-analysis results are reproducible the study will provide its own contribution too. For
this, the study will trace banks which follow IFRS and IASB listed on LSE, NASDAQ, NYSE
and European Stock Exchange and Thomson reuters for available financial reports. The study
also uses the LexisNexis database for when the financial reports were published. The study will
47
synthesize this data and provide results on how the new expected credit loss model has affected
banks.

Philosophy
Research philosophy is the science of research which looks at research assumptions and their
nature to serve the research strategy. Research philosophy is calculated against pragmatism,
positivism, realism, objectivism, constructivism and interpretivism (Ramanathan, 2008).
Researchers will often look at quantitative methods of research as positivist. This is because
methods of rigorous data collection provide reliable results which are derived from a large
sample of studies (Grove, Burns & Gray, 2013). Positivist research look at the world as an
objective reality to test their hypotheses, although in recent years this has reduced to theory since
capturing an objective truth is difficult (Leimeister, 2010). In this case the researcher assumes
that another researcher can replicate the results in his own findings which is what this study aims
to do for this research through the meta-analysis.

Data Collection
Data will be collected to assess how the changes made by the accounting standard bodies during
the 2008 financial crisis and Covid-19 have affected financial reporting for banks which comply
with IFRS and GAAP notably the model of fair value during 2008 and expected credit loss
model during Covid-19. Data collection is a process of collecting relevant data and information
which help identify solutions to the research problem in question. There are two types of data
collection methods, primary and secondary both of which are combined to bring about desired
results. To conduct primary research, interviewing bank regulators globally would make for a
rich data collection to verify the data collected in this case. However, due to time-constraints
attached to this study and lack of finance that is not possible. The study compensates this by
creating a comprehensive literature review using secondary sources and constructing the
methodology in the form of a meta-analysis. The secondary sources include journals from ABS
ranking, google scholar, UoB subscription, newspaper articles and company websites. Meta-
analysis is a synthesis of multiple case studies which are reduced and coded. This research
allows researchers and policymakers to understand the effect of various studies and the
variability in those studies which lead to more informed decisions regarding policy making from
a single study.
The effects of the changes made by IFRS and IASB will be different in each sector, the main
focus of this study is the banking sector mainly looking at European and USA banks as they
comply with IFRS and IASB. As is common with all research, multiple methods of data
collection are used so that where one type of data collection does not provide desired results a
48
second set of data can be used. Sometime multiple methods can verify research conducted
through one set of data with another set. Data will be collected using bank annual reports, yahoo
finance, Thomson Reuters, SNL database, world bank and so forth which will form a rich part of
this study.
For the study, a list of all banks in Europe and USA will be derived, the list will be reduced to
only those which comply with IFRS and GAAP. At the moment 480 banks report under US
GAAP and 362 banks report under IFRS (McDonough, Panaretou & Shakespeare, 2020). Since
there is a time constraint to this study it will not be possible to assess this many banks.
Therefore, the data will be further reduced to only those which provide information of their
annual reports. This will be further reduced to only those which can be easily interpreted in
English language and then further reduced to large banks only since data for these banks is more
easily accessible. This will be further synthesised to those banks listed on London Stock
Exchange, NYSE, NASDAQ, S&P 500 and Euro Bank. To test the effects during the 2008
financial crisis the study will use data from 2007-2012 whereas for Covid-19 data from 2017-
2020 will be used since there is no available information before or after this date. This will be
tested using a regression model analysis. Since developing regression equations are complex and
require additional time they will be developed in the later report.

Data Analysis
In research, data analysis is a process which reduces data into small fragments to build a story
and interpret the insights to find results for the question posed. The data analysis in this case is
reduced to provide a systematic literature review. Firstly, the data is condensed into 3* and
above journal articles although 2* are also accepted which are peer-reviewed as well as academic
books. Next the data is coded into subject relevance with five key areas on which to focus upon.
These were related to ‘IFRS and IASB’, ‘Fair value’, ‘Financial Crisis’, ‘Covid-19’ and
‘Expected credit Loss’. For the meta-analysis, the data is reduced to those studies to include data
of European and USA banks which comply with IFRS and IASB. Once the data is coded and
reduced, a summary is produced of this data. Coding and reducing data into small fragments
allow the researcher to become familiar with each aspect of data for cross comparison purposes.
Limitations
The first obvious limitation to the study is Covid-19 does not allow for any physical interactions
for face-face interviews whereas using online interviews to construct findings is time-consuming
because internet connection issues may create a lag in processing times. The time constraint
attached to this study means a sample of a greater size is not possible. Since the study is on a
global scale reaching different bank regulators would require additional time. Therefore, the
study compensates this by creating a comprehensive literature review using secondary research

49
and a meta-analysis of previous research and rigorous sampling of data collection using
secondary databases. Since IFRS 9 has only been implemented in 2017 the data will only stretch
to 3 years therefore results concluded in this study are neither reliable nor unreliable, the reader
must see to these results upon individual interpretation.
Ethical Considerations
Adhering to appropriate ethical principles is important for conducting research as any unethical
behaviour may result in a code of misconduct. The research will specifically avoid any research
or datasets which are not anonymous in obtaining information, in case of any doubt the research
will not use those datasets. As the ethical checklist is provided in the appendix and is signed
suggests there are no ethical issues of concern, as the research is obtaining past information to
draw conclusions on the findings and results.
Expected findings and outcome
The expected outcome and findings are to see whether the changes made by accounting
standards bodies have a positive or negative impact on financial institutions during periods of
economic downturns. The study expects to find a positive correlation between the independent
variables and dependent variables to suggest that the decisions made by accounting standards
bodies should be welcome and approached with confidence.
Additionally, when sampling, one set of sampling is usually not enough to be able to produce
appropriate conclusions therefore the study comprises of two sets of data. One to test the
effectiveness of fair value against historical costing and second to test the new expected credit
loss under IFRS 9 prior to implementation and post implementation. Both sets of data are for
comparison purposes to assess the effectiveness of accounting standard bodies. The purpose of
assessing the probability regression model is to control for any endogeneities and compare
whether the changes made by the accounting standard bodies are effective.

Work Programme

50
Proposed Chapter Headings and Sub-Headings
1. Introduction
2. Literature Review
2.1.Conceptual framework
2.2. Impact of economic downturns on Financial Institutions
2.3. 2008 Financial Crisis
2.4. Changes made by IFRS and IASB and criticisms
2.5. Evaluation of Fair Value vs Historical Costing
3. Covid-19 Pandemic
3.1. Pre-Crisis changes to IFRS 13 and IFRS 9
3.2. Assumptions
3.3. Expected Credit Loss Model
4. Research questions
5. Methodology
6. Discussion of Findings
7. Conclusion and Summary

51
Initial list of references
Abad, J. and Suarez, J., (2017) Assessing the cyclical implications of IFRS 9-a recursive model (No. 12).
ESRB Occasional Paper Series.

Allen, F. and Carletti, E., (2008). Mark-to-market accounting and liquidity pricing. Journal of accounting
and economics, 45(2-3), pp.358-378

Barnoussi, A.E., Howieson, B. and van Beest, F., (2020) Prudential Application of IFRS 9:(Un) Fair
Reporting in COVID‐19 Crisis for Banks Worldwide?!. Australian Accounting Review, 30(3), pp.178-
192.

Bengtsson, E., (2011) Repoliticalization of accounting standard setting—The IASB, the EU and the
global financial crisis. Critical Perspectives on Accounting, 22(6), pp.567-580

Bowen, R.M., Khan, U. and Rajgopal, S., (2010) The economic consequences of relaxing fair value
accounting and impairment rules on banks during the financial crisis of 2008-2009.

Cifuentes, R., G. Ferrucci, and H.S. Shin. (2005) “Liquidity risk and contagion.” Journal of the European
Economic Association 3: 556-566

Ehalaiye, D., Tippett, M. and van Zijl, T., 2017. The predictive value of bank fair values. Pacific-Basin
Finance Journal, 41, pp.111-127.

Fiechter, P., Landsman, W.R., Peasnell, K. and Renders, A., (2017) The IFRS option to reclassify
financial assets out of fair value in 2008: the roles played by regulatory capital and too-important-to-fail
status. Review of Accounting Studies, 22(4), pp.1698-1731.

Gračanin, Š. and Kalač, E., (2011) The impact of fair value accounting on the crisis in banking sector of
EU and USA. Economic research-Ekonomska istraživanja, 24(2), pp.126-153.

Giner, B. and Mora, A., (2019) Bank loan loss accounting and its contracting effects: the new expected
loss models. Accounting and Business Research, 49(6), pp.726-752

Hashim, N., Li, W. and O'Hanlon, J., (2019) Reflections on the development of the FASB’s and IASB’s
expected-loss methods of accounting for credit losses. Accounting and Business Research, 49(6), pp.682-
725

52
Haswell, S. and Evans, E., (2018). Enron, fair value accounting, and financial crises: a concise
history. Accounting, Auditing & Accountability Journal

Krüger, S., Rösch, D. and Scheule, H., 2018. The impact of loan loss provisioning on bank capital
requirements. Journal of Financial Stability, 36, pp.114-129.

Liao, L., Kang, H. and Morris, R.D., (2020) The value relevance of fair value and historical cost
measurements during the financial crisis. Accounting & Finance

Laux, C. and Leuz, C., (2009). The crisis of fair-value accounting: Making sense of the recent
debate. Accounting, organizations and society, 34(6-7), pp.826-834

Laux, C. and Leuz, C., (2010). Did fair-value accounting contribute to the financial crisis?. Journal of
economic perspectives, 24(1), pp.93-118.

Menicucci, E. and Paolucci, G., (2016). Fair value accounting and the financial crisis: a literature-based
analysis. Journal of Financial Reporting and Accounting

Nölke, A., 2009. The politics of accounting regulation: Responses to the subprime crisis. Global finance
in crisis: The politics of international regulatory change, pp.37-55.

Osho, A.E. and Ajetunmobi, T.P., (2018) Justifying the concept of fair value as a theory through
International Financial Reporting Standard (IFRS). Research Journal of Finance and Accounting, 9(18),
pp.31-39

Plantin, G., H. Sapra, and H.S. Shin. (2008) “Marking-to-market: Panacea or pandora’s box?” Journal of
Accounting Research 46: 435-460.

Song, C.J., Thomas, W.B. and Yi, H., (2010). Value relevance of FAS No. 157 fair value hierarchy
information and the impact of corporate governance mechanisms. The Accounting Review, 85(4),
pp.1375-1410

53
Bibliography
Saunders, M., Lewis, P., & Thornhill, A., (2009) Research Methods for Business Students 5th ed. Harlow.
Pearson

Grove, S.K., Burns, N., & Gray, J., (2013) The Practice of Nursing Research 7th edition. Elsevier: London

McDonough, R., Panaretou, A. and Shakespeare, C., 2020. Fair value accounting: Current practice and
perspectives for future research. Journal of Business Finance & Accounting, 47(3-4), pp.303-332

Ramanathan, T.R., (2008), The role of organizational change management in offshore outsourcing of
Information Technology services: Qualitative case studies from a multinational pharmaceutical company.
Florida, Boca Raton

Leimesiter, S., (2010) IT Sourcing Governance: Client Types and Their Management Studies. Gabler

Abad, J. and Suarez, J., (2017) Assessing the cyclical implications of IFRS 9-a recursive model (No. 12).
ESRB Occasional Paper Series.

Allen, F. and Carletti, E., (2008). Mark-to-market accounting and liquidity pricing. Journal of accounting
and economics, 45(2-3), pp.358-378

Barnoussi, A.E., Howieson, B. and van Beest, F., (2020) Prudential Application of IFRS 9:(Un) Fair
Reporting in COVID‐19 Crisis for Banks Worldwide?!. Australian Accounting Review, 30(3), pp.178-
192.

Bengtsson, E., (2011) Repoliticalization of accounting standard setting—The IASB, the EU and the
global financial crisis. Critical Perspectives on Accounting, 22(6), pp.567-580

Bowen, R.M., Khan, U. and Rajgopal, S., (2010) The economic consequences of relaxing fair value
accounting and impairment rules on banks during the financial crisis of 2008-2009.

Cifuentes, R., G. Ferrucci, and H.S. Shin. (2005) “Liquidity risk and contagion.” Journal of the European
Economic Association 3: 556-566

Ehalaiye, D., Tippett, M. and van Zijl, T., 2017. The predictive value of bank fair values. Pacific-Basin
Finance Journal, 41, pp.111-127.

54
Fiechter, P., Landsman, W.R., Peasnell, K. and Renders, A., (2017) The IFRS option to reclassify
financial assets out of fair value in 2008: the roles played by regulatory capital and too-important-to-fail
status. Review of Accounting Studies, 22(4), pp.1698-1731.

Gračanin, Š. and Kalač, E., (2011) The impact of fair value accounting on the crisis in banking sector of
EU and USA. Economic research-Ekonomska istraživanja, 24(2), pp.126-153.

Haswell, S. and Evans, E., (2018). Enron, fair value accounting, and financial crises: a concise
history. Accounting, Auditing & Accountability Journal

Krüger, S., Rösch, D. and Scheule, H., 2018. The impact of loan loss provisioning on bank capital
requirements. Journal of Financial Stability, 36, pp.114-129.

Liao, L., Kang, H. and Morris, R.D., (2020) The value relevance of fair value and historical cost
measurements during the financial crisis. Accounting & Finance

Laux, C. and Leuz, C., (2009). The crisis of fair-value accounting: Making sense of the recent
debate. Accounting, organizations and society, 34(6-7), pp.826-834

Laux, C. and Leuz, C., (2010). Did fair-value accounting contribute to the financial crisis?. Journal of
economic perspectives, 24(1), pp.93-118.

Menicucci, E. and Paolucci, G., (2016). Fair value accounting and the financial crisis: a literature-based
analysis. Journal of Financial Reporting and Accounting

Nölke, A., 2009. The politics of accounting regulation: Responses to the subprime crisis. Global finance
in crisis: The politics of international regulatory change, pp.37-55.

Osho, A.E. and Ajetunmobi, T.P., (2018) Justifying the concept of fair value as a theory through
International Financial Reporting Standard (IFRS). Research Journal of Finance and Accounting, 9(18),
pp.31-39

Plantin, G., H. Sapra, and H.S. Shin. (2008) “Marking-to-market: Panacea or pandora’s box?” Journal of
Accounting Research 46: 435-460.

Pigott, T.D. and Polanin, J.R., (2020) Methodological guidance paper: High-quality meta-analysis in a
systematic review. Review of Educational Research, 90(1), pp.24-46

55
Stewart, L., Moher, D. and Shekelle, P., 2012. Why prospective registration of systematic reviews makes
sense. Systematic reviews, 1(1), pp.1-4

Song, C.J., Thomas, W.B. and Yi, H., (2010). Value relevance of FAS No. 157 fair value hierarchy
information and the impact of corporate governance mechanisms. The Accounting Review, 85(4),
pp.1375-1410

56
Appendix B

SCHOOL OF MANAGEMENT
TAUGHT POSTGRADUATE PROJECT ETHICS CHECKLIST
RESEARCH ETHICS APPROVAL NEEDS TO BE OBTAINED BEFORE RESEARCH
CAN BEGIN

Project Title:…The effects of the 2008 financial crisis on accounting standards within the global banking
industry and the implications it has had on the response to Covid-19
…………………………………………………………………………………………

Name of Student :.……………Hafsa Hakeem. ………

…………………………………………………….

Student Contact Details – email

address…………hhakeem@bradford.ac.uk………………………………………..

Please delete as appropriate: MSc (taught stage)

Has the student attended appropriate ethics training? Yes

SUPERVISOR/MENTOR/MODULE LEADER DETAILS - FOR MSc/MBA

SUPERVISOR/MENTOR, DBA MODULE LEADER TO COMPLETE

Name of Principal Supervisor/Mentor/DBA module leader: Mohamed Khaled

Eldaly………………………….

Supervisor/Mentor/DBA module leader contact details:

Email address…M.K.Eldaly@bradford.ac.uk……………………………………………………….

Project Summary Table – For student to complete

The purpose of this study is to gain a further understanding of the role of
Aim or purpose accounting standards bodies and the reforms produced by them during
of project – what is economic downturns and their relevance and importance on company
it trying to find performance. The study expects to find a positive correlation between
out, explain, accounting reforms and company performance to evaluate those studies
predict? which criticise these reforms. Two crises have been evaluated, firstly the
2008 financial crisis and secondly Covid-19. Furthermore, the study
creates a synthesized study of all available literature to answer the
research questions posed.
RQ1 – To what extent was the role of the accounting standard board’s
Research during the 2008 financial crisis appropriate and timely?
question(s) or RQ2 – To what extent does fair value hold a higher relevance value than
objectives historical costing?
RQ3 – How did the accounting standards board’s use the 2008 financial
crisis in hindsight in their response to Covid-19 for the global banking
industry

57
Methods of data Due to the ongoing pandemic collecting primary data will not be possible
collection and for this particular study. Furthermore, interviews and surveys would not
analysis (briefly) address the problem in question appropriately. Therefore, to compensate
this the study conducts a systematic review of meta-analysis combining a
rigorous sampling of data collections from previous research to come to a
conclusion and bring about new research design ideas. Furthermore, the
literature review provides a detailed review using secondary sources.

58
Table 1: Only complete Table 1 when secondary data are to be used
(i.e. existing datasets whether qualitative or quantitative, policy or governance or other
documentation, minutes of meetings etc)
Anonymity in data sources
Availability of data sources
Does the data set provide data identifiable to an individual No
or organisation?
No, any information from the data used is anonymised so
that the data cannot be used to obtain any individual or
organisation’s personal information.
Do the datasets used allow identification of an individual No
or organisation when combined together (e.g. dataset of
anonymous organisations but with postcodes and a look-
up table of head office post codes)?
No, the datasets used would not allow for any personal
information to be retrieved of any individual or any
individual working in any of the companies being used or
the organisation. In the case where there is any data
which suggests as such will not be used as part of the
research.
Publicly available or through UoB subscription? Yes
All company information is publicly available and
accessible through official company website, on the SNL
database, the LSE, NASDAQ, NYSE, Euro bank and S&P
500. Annual reports can be directly downloaded. Journal
articles are available through UoB subscription while
google scholar is also a publicly available database. As
for academic book they can be accessed through libraries
or through google books and UoB subscription.
Do you need permission(s)? No
No
If Yes, has permission been obtained? (if so, or in
process, please provide brief details)
Permission in this case would not be needed since all the
information required is publicly available.
Table 2: Complete Table 2 when primary data are to be collected – only complete for the methods
being used, leave other sections blank
If interviews or focus group(s) are to be used:

Vulnerability Can any of the participants be thought of as Yes/No

vulnerable (think about power relations in the
workplace and in relation to the researcher, e.g.
participants nominated by managers or who
know the researcher personally may feel
obliged to participate)?

Scale Approximately how many interviews? ………….

Approximately how many focus groups? …………….

Length of time Approximate length of interviews? …………….

Approximate length of focus groups? …………….

What are the selection criteria for participants

Participants (roles, professions, ages, gender, etc)? For
example, ‘accountants having worked at least
5 years in tax’)

Content of Type and topic of questions, e.g. opinions

interviews about employment law, attitudes to gender
equality, experiences of applying for work,

e.g. country and venue, for example, ‘Lagos,

Location participant workplace’

Method of e.g. audio recording, video recording,

recording data handwritten notes
I confirm that all participants providing primary data will be guaranteed anonymity. Yes/No

If observation is to be used:

Vulnerability Can any of the participants be thought of as

vulnerable (think about power relations in the Yes/No
workplace and in relation to the researcher, e.g.
participants nominated by managers or who
know the researcher personally may feel
obliged to participate)?
Location e.g. Netherlands - office environment, airport
lounges in UK, cafes in Paris, shoe factory in
Peterborough

Method of e.g. researcher field notes, video recording

recording data

Focus of Who and what will be observed? e.g. ‘Social

observation interactions between baristas and their
customers’, ‘participant observation of
accountants’ community of practice’

I confirm that all participants providing primary data will Yes/No

be guaranteed anonymity.

2
If survey(s) are to be used:

Vulnerability Can any of the participants be thought of as

vulnerable (think about power relations in the Yes/No
workplace and in relation to the researcher, e.g.
participants nominated by managers or who
know the researcher personally may feel
obliged to participate)?
Target population Who and how many? e.g. 1800 employees in
GoodFood stores, grades 4-12

No of respondents How many of the target population are

sought expected/needed to respond?

Type of survey e.g. face to face, email, online, paper etc

Length of survey Approximately how many minutes to complete

the survey?
Content of survey Type and topic of questions, e.g. opinions
about employment law, attitudes to gender
equality,
experiences of applying for work,

I confirm that all participants providing primary data will Yes/No

be guaranteed anonymity.
If other methods are to be used, please provide brief details
Due to covid-19 restrictions and the time length of this study, conducting interviews
and surveys would not provide the solutions to the questions required for the research
proposal. Furthermore, the research would like to consider the global banking industry
therefore, contacting bank regulators in this time span is not feasible. Therefore to
compensate for this the study will use meta-analysis and statistical analysis from the
research’s own contribution to draw upon similar answers taking into consideration
both 2008 financial crisis and Covid-19.

3
Table 3: For all projects

Conflict of interest Is there any funding/sponsorship for the project? No

There is no funding being used for this project

Will the findings be reported in ways additional to the No

dissertation, e.g. summary report to participating
organisations or other interested parties, external
publications?
No, the sole purpose of the findings is for the dissertation.

Other potential issues – please provide brief details

4
 PLEASE LEAVE THIS PAGE BLANK WHERE THE CHECKLIST FORMS PART OF
THE MSC/MBA STUDENT DISSERTATION PROPOSAL ASSIGNMENT.
THIS PAGE IS TO BE COMPLETED BY THE SUPERVISOR/MENTOR ONCE
SUPERVISION HAS STARTED, OR BY THE DBA MODULE LEADER.
RESEARCH ETHICS APPROVAL NEEDS TO BE OBTAINED BEFORE
RESEARCH CAN BEGIN. [This might need to be clarified as a literature review
does not require ethical consideration BUT data collection from a pilot study is
not permitted. The latter is frequently violated!]
PLEASE COMPLETE and SIGN ONE of the two boxes below
(in the case of an MSc or MBA student project, we do require a Supervisor’s or
mentor’s signature in whichever box is relevant, before we can have the checklist
signed off by the Research Ethics Panel. For DBA module assignments, the DBA
module leader will sign):

1. I have discussed this project with my student AND

2. I confirm that there are no ethical issues requiring further consideration.

(Any subsequent changes to the nature of the project will require that the Panel are
informed)

Signature (Supervisor/mentor/module leader) Mohamed Khaled Eldaly…Date:

…24/05/21

PLEASE PRINT NAME Mohamed Khaled Eldaly……………………………………………

OR

1. I have discussed this project with my student AND

2. I confirm that there are ethical issues requiring further consideration and would appreciate the
opportunity to discuss these with a member of the Ethics Panel.

Signature (Supervisor/mentor/module leader): ……………………….Date:

…………………………

PLEASE PRINT NAME ……………………………………………………………………………………

If you are required to give more information or to complete a full ethics

application form, you will be informed. Otherwise you will receive notification
that the project may proceed.

Please submit this checklist (with your dissertation proposal or/and other supporting document) by
email to:

5
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model (No. 12). ESRB Occasional Paper Series. Retrieved on 30th July 2021 from:
http://www.econstor.eu/bitstream/10419/193607/1/esrb-op-12.pdf

Abad, J. and Suarez, J., (2017) Assessing the cyclical implications of IFRS 9-a recursive
model (No. 12). ESRB Occasional Paper Series

Abutabenjeh, S. and Jaradat, R., (2018) Clarification of research design, research methods,
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Adzis, A.A., Tripe, D.W. and Dunmore, P., (2016) IAS 39, income smoothing, and pro-
cyclicality: evidence from Hong Kong banks. Journal of Financial Economic Policy, 8(1)

Allen, F. and Carletti, E., (2008). Mark-to-market accounting and liquidity pricing. Journal of
accounting and economics, 45(2-3), pp.358-378

Amel-Zadeh, A., Barth, M.E. and Landsman, W.R., (2017) The contribution of bank
regulation and fair value accounting to procyclical leverage. Review of accounting
studies, 22(3), pp.1423-1454

Armat, M.R., Assarroudi, A., Rad, M., Sharifi, H. and Heydari, A., (2018) Inductive and
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Arouri, M.E.H., Bellalah, M., Hamida, N.B. and Nguyen, D.K., (2012) Relevance of fair
value accounting for financial instruments: Some French evidence. International journal of
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Bagna, E., Di Martino, G. and Rossi, D., (2015) No more discount under enhanced fair value
hierarchy. Applied Economics, 47(51), pp.5559-5582

6
Barnoussi, A.E., Howieson, B. and van Beest, F., (2020) Prudential Application of IFRS
9:(Un) Fair Reporting in COVID‐19 Crisis for Banks Worldwide?!. Australian Accounting
Review, 30(3), pp.178-192

Barth, M.E. and Landsman, W.R., (2010) How did financial reporting contribute to the
financial crisis? European accounting review, 19(3), pp.399-423

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